IronStats

Germany’s Angela Merkel Now Holding the Keys to the World’s Economy

The latest crisis across the pond has reared its ugly head, and it is not the Brexit. Italy’s large and shaky banking sector is about to require a massive bail out (or bail in alternatively) in order to prevent bank failures and bank runs across not only the Italian peninsula, but conceivably all of the European continent. The only person with the ability to stop such a crisis is ironically EU strongman German Chancellor Angela Merkel. Even now she is wrestling with questions about unfettered money printing and unlimited national asset buying that will determine the future of not only the EU economy, but that of the entire world, for years and potentially decades to come. Consider what is hinging on Merkel’s decision to allow or forbid large scale quantitative easing across the cultured continent now. What Happens if Merkel Refuses to Allow Large Scale National Money Printing? Saving Italian and struggling European banks and the failing economies of the periphery in Europe requires quantitative easing on a large scale and the end to German enforced austerity throughout the continent. Angela Merkel knows this all too well, but she is wrestling with her own personal German demon in the form of the ghost of Herr Haverstein. Rudolph Haverstein was the German Central Banker responsible for limitless German money printing almost a hundred years ago that led to hyperinflation and the ultimate collapse of the Weimar Republic and subsequent rise of Adolph Hitler. In the collective German memory, this is the worst possible route to go with potentially disastrous consequences not only for Germany but all of continental Europe. Should Premier...

Why China and India Are Investing in Gold

While gyrations in the price of gold have been in the news lately, another news item has concerned continued gold purchases by consumers in China and India.  In both cases, the citizens of these countries have an appetite for gold that seems to have been stoked by the recent decline in the price of gold.  While there are varying reasons for such purchases, as discussed below, the strong demand for the yellow metal from China and India shows that gold is truly a global currency.  If the price drops on markets in one or more countries, the demand for the precious metal in other countries where gold is highly regarded is likely to pick up, as has been seen recently.  What’s Behind the Demand for Gold in China and India? In both countries there are cultural factors which undergird the demand for gold.  In India, gold has long been a prized possession and a prime feature in gift giving during auspicious times of year, and for major events such as weddings.  This provides the impetus for a fairly constant demand for the metal throughout the year, as even during non-auspicious periods Indian families may buy gold if the price drops for future use. In China, the historical lack of a government pension scheme has led to Chinese families using precious metals such as gold as a way to preserve wealth and prepare for retirement.  After being prohibited from owning gold for many years once China fell under communist rule, the authorities have in recent years allowed Chinese citizens to purchase gold and this has led to an upsurge in...

Don’t Fear the Taper: Is the Case for Gold Still Strong?

Federal Reserve taper talk has been in the news recently, with the central bank evincing an interest in cutting back on its monthly purchases of bonds due to a stabilizing economy.  While it’s too soon to say how serious the Fed is about pursuing this path, it’s not clear that recent economic numbers are in fact strong enough to warrant pulling back on the accelerator.  Even if the Fed does reduce its purchases somewhat, if the economy continues to weaken, the central bank may find itself increasing its quantitative easing (QE) measures in short order.  In either case, the fundamental value gold offers remains unchanged, and its centuries-long role as a store of value seems unlikely to dissipate anytime soon.  How Strong is the Economy? While the economy has certainly recovered from the depths of the financial crisis of 2008/2009, some of the latest reports have shown weakness.  If this trend continues, the economy could slip into a dreaded double-dip recession.  One of the headwinds to business activity is the federal government sequester, which will result in lost wages to employees forced to take furlough days, and could dampen economic activity as a result.  In addition, the price of oil remains at elevated levels compared to past years, and this acts as another headwind to economic activity.  While it is impossible to predict exactly how things will play out, it certainly doesn’t seem like the robust growth that would cause the Fed to aggressively cut back on its policy of stimulating the economy via QE is likely to erupt anytime soon.  Prospects for continued monetary stimulus If it is...

Mutiny at the Fed: Is Disagreement Among Central Bankers Good for Gold?

Recently talk about the Federal Reserve’s Quantitative Easing (QE) program has turned to “tapering,” or scaling back on the amount of bonds the Fed purchases each month in an effort to stoke the economy.  Along with this talk have come indications from the minutes of recent Fed meetings of disagreement among at least some members of the Central Bank’s voting committee as to how long to continue the QE program, in view of its potential for causing asset bubbles, among other concerns. Whether such worries represent a full-fledged revolt against the QE program or just expressions of concern is hard to determine.  However, for gold investors the issue is an important one, as actions taken by the Federal Reserve, as well as other Central Banks, can have a dramatic impact on the price of gold.  The Fed and the Gold Bull Market After many years in the doldrums, the price of gold began its historic ascent (which would eventually propel the yellow metal to all-time highs in nominal terms) in the 2001-2002 period as the Fed moved to ease monetary conditions in the aftermath of the stock market crash of 2000 and the terrorist attacks on 9/11.  After a dramatic decline in 2008, gold rose along with other equity assets in 2009 as the Fed once again turned to accommodative monetary policy in the wake of market turbulence.  Gold’s Recent Price Action As economic numbers improved following the financial crisis of 2008, investors placed bets on a robust recovery, as well as the expectation that with growth strong, the Fed would be likely to pare back its financial stimulus...

States Back Gold as Legal Tender

While recent gold price volatility has some questioning the durability of the bull market in gold which began way back in 2001, the move by a variety of American states to pass legislation enshrining gold and silver as legal tender shows that at least some officials in these states recognize the value precious metals offer.  With the Federal Reserve’s Quantitative Easing (QE) program continuing unabated, the resulting tsunami of printed money poses risks to the value of the dollar.  Precious metals such as gold have long been a hedge against inflation resulting from this type of currency debasement, which may explain the recent moves in some states to promote the use of gold and silver as legal tender.  The Case for Gold as Currency Gold has hundreds of years of history as a currency in the form of gold coins, often in conjunction with silver in a bimetallic system.  It was only in the 20th century, when the crushing expense of financing the First World War and the subsequent great depression caused sovereign nations to depart from a gold standard and move towards unbacked fiat currencies.  Such currencies are not convertible into gold, silver, or any other store of value, but derive their worth from the full faith and credit of the nation issuing them. The advent of fiat currencies in recent times has brought with it a danger that stems from the very nature of an unbacked monetary system, namely, price inflation caused by currency debasement.  In the case of gold, the supply of the metal at any one time is constrained by the difficulty and expense involved...

Are Gold’s Fundamentals Still Strong?

With the bull market in gold which began in 2001 seeming to run out of steam over the past few months or so, it’s a good time to take a look at the fundamental underpinnings of the bull run and see if they are still in place. Corrections and consolidation can occur even in the midst of strong bull markets, so the fact that the gold price has declined recently does not in itself mean that the bull market is over. Instead, we should examine the factors which have driven gold’s decade long rise in price, and see if they are still in existence if we want to form an impression about the whether the bull market is on its last legs or if it still has room to run. Fundamental Factors Behind the Gold Price Gold has long served as a store of value, especially in times of crisis when inflationary policies are in effect. It performs best during such times for a variety of reasons, including its long history as a monetary metal and the fact that its rarity makes it immune to the debasement that can afflict holders of unbacked fiat currencies. While gold has held its value admirably over long periods of time, there are periods of time when the price of the metal may languish or decline. This may occur during periods of low inflation or strong economic growth when other assets, especially those that pay dividends or offer earnings growth, are seen as superior to the precious metal. Therefore, to determine if gold’s fundamentals remain strong, it is important to examine the economic...