Gold and Gibson’s Paradox

There is a myth prevalent today that the gold price always falls when interest rates rise.

The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed’s Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.

The chart below is of a time when the opposite was demonstrably true. From March 1971 to December 1979 the trends in both interest rates and the gold price rose and fell at the same time Continue reading Gold and Gibson’s Paradox

Credit deflation and gold

Alasdair Macleod
16 July 2015

There is a common view in financial markets that credit deflation is bad for gold prices, because gold nowadays is regarded as an asset to be sold in the scramble for cash when people are forced to pay down their debts. When asked by Congressman Ron Paul his opinion on gold four years ago, Ben Bernanke replied it was not money, just another asset, appearing to confirm this view.

Doubtless Bernanke’s view is shared by nearly all other central bankers in the advanced economies and by executives in the banks which have profited handsomely from monetary and credit inflation. But it is not shared by the majority of ordinary savers around the world who see it still as the ultimate store of value at a time of fiat currency inflation. For them, gold is the money to save, driven out of circulation by inferior currencies. We know this to be true throughout Asia where the bulk of the world’s population lives; but even millions of ordinary Americans continue to accumulate silver eagles because they still recognise the monetary attributes of precious metals Continue reading Credit deflation and gold

Productivity misconceptions

In the media warm-up for Wednesday’s UK budget, we were told of Britain’s poor productivity and Chancellor Osborne subsequently confirmed that his priority is to address it.

Comparative figures for Europe quoted by the BBC were sourced from the OECD and are replicated in the chart below.

Labour productivity chart

It represents GDP per hour worked, using the US dollar on a purchasing power parity basis across different EU nations. And it shows the UK as lagging other European countries badly, which presumably is why the Chancellor feels the need to act. Continue reading Productivity misconceptions

Greece’s referendum

This coming Sunday Greece will hold its referendum.

The question to be asked is not, as the foreign press initially reported it, about leaving the euro. It is about accepting or rejecting the troika’s bail-out terms.

The Greek government’s finance minister is making this distinction clear to voters in the few days remaining. As if to ram the point home, Greece was reported earlier this week to be considering taking out an injunction at the European Court of Justice to block attempts to expel Greece from the euro on the grounds that there is no mechanism to do so. Well, there is in the Lisbon Treaty, but it needs Greece’s approval, which amounts to the same thing Continue reading Greece’s referendum

The euro crisis

Alasdair Macleod
29 June 2015

Make no mistake; the Greek crisis is a euro crisis that threatens the solvency of the ECB itself, and therefore confidence in the currency.

Before going into why, a few comments on Greece will set the scene.

Last weekend it became clear that Greece is heading for both a default on its government debt and also a failure of its banking system. With the benefit of hindsight it appears that the Greek government was unwilling to pretend that it was solvent and extend its financial support as if it was. The other Eurozone finance ministers and the troika were not prepared to accept this reality. Continue reading The euro crisis