Sunday, March 05, 2006

Reasons for a Gold Price Increase

Strickly speaking rising interest rates are not a reason for a gold price increase, but they correlate very well with a rising gold price.

Coming out of a depression or long deep recession people will start saving and increase the rate at which they save. Then there will come a point when they will start to decrease their savings rate and increase their consumption rate usually because the purchasing power of their savings is going down so that there is less incentive to save. They may as well start buying stuff that has real value now rather than wait till later when it will be more expensive.

Particularly since 1971+ when the world gave up using currencies redeemable for something that is nobody's liability like gold and silver, governments have noticed the high savings rate and taken advantage of it by creating unusually large amounts of government fiat tokens. People would save anyways which would keep most of those extra fiat tokens out of the market for goods and services. But there comes a point when those extra fiat tokens start to increase prices despite high savings rates.

It appears that Japan is entering into that phase. The Japanese government has taken advantage of the high savings rate of the Japanese savers particularly since 1990 when Japan went into a deep long recession. The Japanese government since the high point of their economy in 1990 has created massive amounts of debt and Yen fiat tokens, all the while keeping interest rates artificially low. Really low. So low that everybody and their brother wanted to borrow Yen at 1% - 0% and use the Yen to buy debt from other countries that had much higher yields. It was called the Yen carry trade. This carry trade has been going on for years and looks to be coming to an end. The Japanese government needs to raise interest rates to try and entice the Japanese to save more. The more savings there are, the more capital can be bought to create new wealth.

The days of easy, no brainer money made from carry trades look to be ending because of rising interest rates in low rate countries. This means a slow down or end of the easy "money" being sent and loaned to the profligate higher rate countries like the US, UK and Australia. Now there is pressure on the countries that the carry trade used to loan "money" to, to increase rates to attract savings. But increasing rates will slow down these economies that are slowing anyways due to too little capital formation over the years used to create too little wealth or no wealth or outright capital consumption like in the US. These country's central banks are between a rock and a hard place. A situation that the governments and central banks created themselves.

No wonder that in the US, at least, the Fed is screamingly unconstitutional. When Americans started to not really care about their constitution, they got a central bank layed on them.

All this because governments will do just about anything to be able to buy their citizen unit's votes. All this because there is now too many USD and Yen in the world. As there is more and more of something, it decreases in value. No wonder people want a higher and higher yield on something that they loan and will not be getting back till further out in time when the thing loaned is worth less.

Increasing interest rates correlate with a gold price increase.

Wall Street's Fixed-Income Profit Engine Shows Signs of Slowing


Fourth-quarter fixed-income trading revenue at New York- based JPMorgan Chase & Co., the No. 3 U.S. bank, plunged 65 percent from the third quarter. The business accounted for $5.7 billion, or 10 percent, of the bank's revenue in 2005.

``Several of our trading books were on the wrong side of interest rates,'' JPMorgan Chief Executive Officer James Dimon, 49, said on a Jan. 18 conference call with reporters. ``It was a bunch of positions that didn't work out.''


No comments: