2014 In Review: How Could Gold Bugs Have Been So Wrong?

By: John Rubino | Mon, Dec 29, 2014
Print Email

Twelve short months ago, the immediate future looked like a lock. Overvalued equities had to fall, ridiculously-low interest rates had to rise, and beaten-down precious metals had to resume their bull market.

The evidence was overwhelming. Debt in the developed world had risen to $157 trillion, or 376% of GDP, by far the highest level on record and clearly unsustainable. Long-term US Treasury rates had been falling for literally three decades and despite a recent uptick were so low that the only way forward seemed to be up.

Ten Year Treasury Bond Yield %
Larger Image

Europe and Japan were drifting into recessions that could easily morph into capital-D Depressions. The eurozone would fragment, Japanese bonds and probably stocks would crater, one or more major currencies would implode. No way to know which event would come first and in what order the other dominoes would fall, but without doubt something had to give.

And gold, of course, had had its correction and was, at the beginning of 2014, perilously close to the mining industry's cost of production. The last time that happened, in 2008, an epic bull market ensued -- and gold-bugs were anxious for a replay.

Gold Price US$
Larger Image

Yet 2014 turned out to be a pretty good year for the powers that be and the economic theories that animate their behavior. Equities boomed, interest rates fell, the dollar soared, and gold ended the year below where it started. Gold miners, after a year of operating at an aggregate loss, have seen their market values crater.

2014 should not have happened, but it did. There's no way to sugarcoat it: the gold bugs were wrong, Austrian economics was wrong, and the Keynesians were right. And now the sound money community is left trying to figure out what it missed and, crucially, whether the problem was merely one of timing or of fundamental worldview. With that in mind, a few explanations for the debacle that was 2014:

So, back to the big question: Does the above refute the sound-money/gold-bug case, or simply delay it?

Almost certainly the latter. Rising dollar-denominated debt leading to a stronger dollar is not a perpetual motion machine. All it does is allow the US and the rest of the world to take on even more debilitating levels of debt than would otherwise be possible.

China, India, Russia and Brazil, meanwhile, are actively bypassing the dollar in favor of trading in their own currencies, while accumulating pretty much all the gold being produced by the world's mines. So the longer the current situation continues, the bigger the disruption when the dollar becomes just one of many global trading currencies.

Meanwhile, artificially depressing bond yields and supporting stock prices can only go so far before valuations (already crazy) become impossible to support with any amount of fiat currency. The yield on some Japanese bonds recently dropped below zero, and US 10-year treasuries are around 2%. US equity prices, margin debt, corporate share repurchases and most other measures of overvaluation are all in record territory. Unless we're moving to a world of negative interest rates (which is a whole different theoretical discussion) and dot-com era P/E ratios, the end for these trends is near.

So this has to and therefore will blow up. And when it does, the world's central banks will respond with debt monetization on a scale that will dwarf QE3 and Abenomics. "Inflate or die" will become official global policy. And gold will behave as it always does in such situations, by going parabolic.

But when? What seemed imminent a year ago now feels a little further out, as oil keeps falling (down another 2.5% as this is written on Dec 29), the dollar keeps rising and everything else is flat to down. Maybe instead of focusing on the numbers, which clearly don't mean as much as they would in a world of actual functioning markets, we should think in terms of philosophy and psychology. Here's a snippet from James Howard Kunstler that gets at the spirit of things without predicting "when things stop working".

"One reason this is happening to us is that we allowed reality to be divorced from truth. Karl Rove wasn't kidding back in the Bush-2 days when he quipped that "we create our own reality." The part old Karl left out is that there's a price for doing that. In the short run, it allows you to pretend that you have superpowers and can act in defiance of the way things really are. In the longer run, your view of the world comports so poorly with the facts of the world that things stop working."

 


 

John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino

John Rubino edits DollarCollapse.com and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

Copyright © 2006-2017 John Rubino

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com