Gold: The Trouble Barometer

Last week Jack Welch sparked off a debate regarding the measurement of government statistics, it was the release of the US’ nonfarm payroll data which got him, and some others, more than a little annoyed.

The issue of how to calculate vital government statistics has become a growing sticking point in recent years, and not just in the US. In the UK, the measure of inflation is increasingly suspect, particularly as the calculation of RPI is about to be changed, whilst in the US the official inflation rate is way off the "real" inflation rate. It’s not just economic data which is affected by political targets, the UK measure of child poverty was badly manipulated by the Labour government in order to appear as if they had met one of their campaign promises.

These issues, why they happen and how they can be resolved is definitely an article for another time however it is becoming increasingly clear to a growing number of people that those who govern do not carry the same interests of those who are governed.

The golden barometer
During times such as these we should place our faith in something which has historically transcended government statistics as well as political goals and semantics. For this reason many are turning to gold as their trustworthy protector from, government efforts to misreport statistics affecting our daily lives by their dangerous policy making and financial stresses.

Many will struggle to understand how we can trust the gold price when it has shown volatility since the 1970s and is deemed by many to be in a "bubble." A new paper by Erb and Harvey shows the real price of gold is now at a historical high across all 23 countries studied. They find that whilst the nominal price of gold has been volatile it has shown a strong trend since the 1970s, however the inflation-adjusted price of gold is volatile without a trend.

They have not just looked at countries which are deemed to be "unsafe" or financially volatile, countries such as Denmark, New Zealand and Switzerland are covered and are also found to be experiencing historically high real gold prices. The authors state "If the real price of gold is a barometer of perceived troubles then there is trouble everywhere. Or alternatively, gold is expensive everywhere." They go on to ask "is the high real price of gold a barometer of the ability of investors to 'see though' inaccurate official inflation reports? Or is the high real price of gold a barometer of irrational pessimism?"

With only 23 countries studied, it is irrational to argue that this is an indication that gold is what everyone is rushing into as they panic about the state of the global economy. But, it is a good place to start.

Why the rise in the gold price?
Gold has always been desired in terms of jewellery and adornments, it has always been precious. So we cannot argue that it is "just expensive."

"Irrational pessimism" is something which many commentators blame the increase in the gold price on. This is partly understandable when you see markets still rushing into currencies whose governments are no longer bothered about pleasing the currency markets.

We now live in a world where countries are no longer proud to have strong currencies. A strong sovereign currency was something which once upon a time was something which countries and their governments aimed for.

However, stable and strong is no longer something which is seen as particularly desirable. Now countries want weaker currencies in order to try and maintain or increase exports, and in light of the financial crisis try and keep it weak in order to prevent deflation at home.

Markets no longer seem to be punishing countries for their potentially fatal policies. Instead, market perceptions in regard to currencies are the ability and ease of which a government demonstrates its ability to maintain an elastic money supply and printing money.

Irrational pessimism would suggest that there is no possibility governments are suddenly going to come to their senses and realise that they are facing a problem which can’t be fixed through loose monetary policies. Whilst it may seem to most of us that the impact of these policies are under-appreciated and enormous, it seems that some, in at least 23 countries, are learning that this crisis may well be something which can’t be fixed by contemporary government thinking and it will affect everyone.

These countries which are driving the demand for gold and, therefore, the real gold price are beginning to realise that banks, central banks and governments have operations which rather than create wealth, are instead destroying what little wealth still exists. Anyone that understands even a shred of monetary history knows debasement when it stares them in the face this obviously.

Gold and fiat money
Gold is a money which cannot be created by government monopoly. Even when it is no longer accepted as legal tender, it cannot be destroyed and therefore it is never totally controlled by those who govern us.

The economies of the US, the UK, Western Europe and Japan are beginning to finally collapse having been run on fiat distortions for long enough. The BRICs are also beginning to show some cracks, they’re not wide enough to do any damage as their distortions haven’t been going on long enough, but they’re there, digging away at the stability of the economies.

Whilst government statistics are something which markets react to at the slightest change, and the media goes crazy about, it is the people within the countries who feel the pinch, regardless of what the statistics say. They are the ones who are really hit by the real inflation rates, by the interest rates and by the quantitative easing. Therefore turning to gold bullion investment, during this endless crisis seems like an excellent way of signalling to governments and the markets that their statistics and currencies count for very little anymore and in fact, gold is where the value is. Once more we should remember the difference between value and price.

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.