11 November 2011

Gold Daily and Silver Weekly Charts - Rickards and Grant Discuss Money and Gold - Jack Kennedy

Gold and silver rallied back from the bear raid yesterday.

The correlation between metals and stocks is still troubling, but it does provide a ready hedge to bullion positions. This suggests that the metals are rising with liquidity and expectations of money printing, and that short term reductions in liquidity will drive the price lower.

Speaking of gold and money, here is a recent video interview with Jim Grant and Jim Rickards, in which they discuss these topics and others.

It is well worth a look, although I admire him greatly, I fear Jim Grant makes a stand on somewhat shaky ground when he calls out Paul Krugman to explain how monetary and fiscal policy worked with regard to 'the depression of 1920-21' and compares it to the current US economy.

Jim forgets to mention that a significant driver for that particular slump was the end of World War I, the return of the soldiers from overseas, and the adjustment from a wartime to a peace time economy.

There is also the little detail that Europe had been ravaged, but the US infrastructure and industrial machine was untouched, and only in need of retooling. The US needed a strong currency to control inflation, and the Fed's primary task was to manage money supply in the face of a naturally growing aggregate demand and rising incomes in the post-war period.

Krugman might be tempted to have some fun with that example and the prescription that raising interest rates now and tightening money supply is the right thing to do. Far from comparable, the situation is almost the opposite! The US is now a net debtor and importer of goods, and domestic demand is slack due to a stagnant median wage.

Yes, the Fed was overly accomodative in the 1920's as can be shown in the last chart in this blog, but the discussion is much more complex than time allows.

Rickards is on case with his discussion of the mispricing of the gold standard back then, and with regard to the SDR as a possible successor to the dollar, although he likens it too much to the US dollar, and says that the IMF has a printing press. He ignores the fact that the SDR is tied to an external standard, in this case a basket of currencies. And there is a contentious discussion amongst the trade powers with regard to the change in that basket. China and Russia are lobbying for other currencies and gold and silver to be included.

So it is a bit glib to suggest that the IMF can print SDR's at will. They *could* do that at some point, but not under the current system. That change in the composition of the SDR could be a key development in the currency war.

Speaking of Currency Wars, it is the title of Rickards new book, and I am waiting patiently for my copy to arrive.

In the meanwhile I started reading Jack Kennedy by Chris Matthews. It is very well written. Matthews is a natural story-teller, and he offers a fresh view of Kennedy based on first person information from JFK's friends, colleagues, and family.

It is a delight to read so far. It is a little light on 'scholarship' for some tastes, but it rings true, and includes an enormous amount of primary source interviews. It is insightful, a unique perspective, and a great read. It answers the question, "Who was Jack Kennedy, and what was he like?" I am thoroughly enjoying it. Matthews hit this one out of the park.

The situation with MF Global is an absolute disgrace. I am spending quite a bit of time looking into it, and will try to keep you apprised of any developments.

Have a pleasant weekend.