Gold bugs should not be worried about the metal's falling price, but Federal Reserve officials should be very concerned, says Jim Rickards, author of "Currency Wars" and senior managing director of Tangent Capital.
While gold prices have dropped over 20 percent since the beginning of the year and gold is down 30 percent from its peak in August 2011, "the fundamental bull case for gold has not changed at all," Rickards told Yahoo.
Rickards proclaimed that the decline in gold prices is more of problem for the Fed than it is for gold bugs.
If you hold the dollar constant, you see the price of gold is dropping, he explained, and when you reverse that, so gold is the constant factor, you see the dollar is getting a lot stronger.
"In other words, a lower dollar price for gold if gold is the constant means the dollar is getting really strong. That's deflationary. That's the Fed's worst nightmare," he told Yahoo.
Last year, the Fed made a historic move when it set an inflation target of 2 percent, but inflation is currently running below that level.
The Fed has shaken up markets with talk of possibly tapering its stimulus programs, but Reuters said some experts wonder if sub-target inflation will actually force the Fed to take a more aggressive approach.
Rickards believes it will, saying that the strong signs of deflation is one reason the Fed will likely have to back away from Fed Chairman Ben Bernanke's ruminations and either maintain or increase the level of asset purchases.
"If the Fed officials are reading market signals, if they even remember what those are, they should be very concerned about" declining gold prices, Rickards said.
He warned that gold prices are confirmation that the Fed's nightmare is materializing.
"The Fed would like real growth, but if they can't get it they will take nominal growth because debt is nominal," he noted.
"We have nominal debts and we need nominal growth and we're not getting it, or at least we're not getting enough of it," he added.
Not everyone agrees that investors shouldn't be worried about the drop in gold prices.
"You need to re-examine your expectations for the gold market if you're long — you need to stop thinking in terms of crisis and start thinking about where gold was pre-crisis," Tom Kendall, director and head of precious metals research at Credit Suisse, told CNBC.
He points back to the days before unlimited easing, and before rabid fears drove people to believe they needed to seek safety in metals. Back then, gold was trading at $1,100 or $1,150, he noted.
Source: Newsmax.com, Money News Friday, 28 Jun 2013 by Michelle Smith http://www.moneynews.com/Markets/Rickards-gold-Fed-dollar/2013/06/28/id/512438#ixzz2XXItnoz0
Comments:
The economy decided that
gold had reached levels way above its useful commodity price, so, like stocks,
investors sold gold to grab the gain they made.
The high price of gold gave “gold users” the incentive to find substitutes
that were cheaper; both actions reduced the demand.
Gold, like land has
limits to its price. Gold is useful in electronics
and popular for jewelry. Land prices should be tied to its return on
investment. A farmer knows how much he
can make with each acre of land he owns and can’t spend more for the land than
it can produce. This correction in gold
has resulted in deflation. The Federal
Reserve System is based on Inflation.
Throughout the 1800s,
the dollar got stronger, so things got cheaper.
Von Mises would say, that’s the way things ought to be. The folks got more for their money, inflation
was adjusted with deflation and saving and investing made sense. Banks, on the other hand, got slapped when
they made bad investments, so they bribed Congress to pass the Federal Reserve
Act, so the people would suffer instead. That also meant that Congress had a
blank check. Now they have a big debt
and are looking for ways to make you pay for it.
Norb Leahy, Dunwoody GA
Tea Party Leader
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