Burning Down the House

The goal of this post (whose title is again going to titillate music aficionados) is to give our readers a quick overview of the state of roughly 20 real estate markets around the world. We’ll purposefully omit countries where the bubble has already clearly burst (like Spain, Ireland or Cyprus), although in many of them the downside may still be severe. A notable exception is the U.S., where the savvy policies of the bearded monetary shaman have helped bring the housing bubble back from the dead.

Germany's housing market so far hasn't managed to enter bubble territory, although the recent influx of scared money, coupled with the ultra-loose policies of the ECB are beginning to work their voodoo.

We intend to start with a brief Austrian explanation of the origin of bubbles and how come they often manifest in the RE sector and we’ll then move on to the actual description of the various RE markets, for which we’ll use a combination of statistical data, third party research, anecdotal evidence and direct experience (we’ve been to many of the countries mentioned and we’ve also had a stint in the construction business a few years ago). It’s worth noting that we’re currently short via long-dated put options (although a paper we recently read and on which we may comment in a subsequent post has had us reconsidering the wisdom of buying long dated options, rather than continuously roll-over short-dated ones) a few banks such as CBA in Australia, BNP in France, RY, BNS and CM in Canada: they’ve been binging on RE during recent years and we suspect they won’t be cheering once it becomes obvious that the party is over.

As an aside, we still have to understand why exactly perpetually rising real estate prices (in the face of massive oversupply to boot) are held to be such a boon for an economy, as they only bring about more debt and/or a decrease in disposable incomes as they keep on tying up more and more resources.

On the Origin of Bubbles

Unless one believes that bubbles are a “gift” of God or the inevitable result of the evil capitalists’ activities, the first thing one has to ask himself is “How come there are bubbles?” and the second one is “How come they always (or at least very often) seem to appear in certain specific sectors of the economy (like e.g. real estate)?”. The answers to these very important questions lie in the thorough study of the theories formulated and expounded by the Austrian School of Economics and in particular by its two heavyweights Mises and Rothbard. If one does not wish to read roughly 2.500 dense pages of actually very sound and interesting economic thinking, then we can suggest him to at least have a look at this great article on the production structure assembled by the always excellent Pater Tenebrarum, whose blog we highly recommend and on whose work we’ll rely rather extensively during the course of this post. Here, we’ll just give a short, to-the-point answer to the questions above, simplifying and summarizing more complex concepts that inevitably need other venues to be treated exhaustively.

First of all, we need to recognize the fact that the production structure (i.e. the productive chain that starting from raw resources and labour delivers a final consumer product) is made up of different stages: higher order (like e.g. real estate, the capital equipment industry etc.) and lower order ones (like e.g. your grocer around the corner). These stages are defined according to their distance from the final consumer goods the production of which is always the ultimate goal of the economy: all factors of production, whether original (land/natural resources and labour) or produced (capital goods) are always employed to produce a final consumer good somewhere down the road (i.e. a trashing machine being built today with the use of raw resources and manual or mechanical labour will one day harvest grains that will then be consumed as food). It is important to note that there exists a lag between the beginning of the production process at the highest order and the actual production of the final consumer good (i.e. you can’t produce an iPhone if you haven’t designed it or built the necessary tools and machinery needed to assemble it). The longer the production structure, the longer the lag. It obviously follows from this fact that all investments in the production structure need to be funded by real resources that have already been both produced and saved (since the additional consumer products that will be produced as a result of these investments won’t be available before a certain lag); also, the financing of higher order stages of production requires significantly more resources than the financing of lower order ones, due to the fact that it takes longer for them to yield a final consumer good with which to repay the investment. In the trashing machine example above, we already need to have the grains with which to feed the labourers employed in its construction: we can’t make them work without subsistence whilst waiting for the machine to be completed and the next harvest to begin, no matter how loudly Paul Krugman argues for such an idiotic approach (by the way, we’d love to see him starve whilst trying to prove that you can indeed put the cart before the horse). Money simply facilitates this process: instead of paying our workers with grains, we give them money and they’re free to spend it according to their needs and wants. But the fact remains that we can only fund production with real resources and the appearance of fiat money (via printing and credit expansion) does not magically make appear real resources as well.

That said, how do we go about deciding the allocation of resources between the different stages of production (i.e. how do we decide whether to invest more in harvesting machines or whether to keep harvesting by hand or even whether to further lengthen the structure by investing in the designing of a plant that will produce new and more efficient tools to facilitate our harvesting)? It all depends on our time preference rate, that is it depends on our willingness to sacrifice present consumption (that we need to save to finance investments) in favour of higher, but future consumption. Each one of us of course has his own personal preferences and in a complex market economy where many economic actors interact all these different preferences combine into forming the originary rate of interest (which is nothing but the society-wide time preference rate), in the same way in which buyers and sellers combine in forming the market price for a good. This originary rate of interest is not set in stone, but rather changes as conditions (like e.g. the size of the pool of real funding) and preferences change, again in the same way as prices do. [For the sake of simplicity we omit to mention here the fact that each and every good has its own specific rate of interest and that there exists a never-fulfilled tendency towards the harmonization of all these different rates.] Originary interest combines with a risk premium (dependent on the creditworthiness of the borrower), a price premium (dependent on the expected changes in the purchasing power of money) and an entrepreneurial profit to form the interest rate.

With the above in mind, we can now begin to see how bubbles come into existence and the sectors in which they are likely to occur. The investor who needs to allocate capital (i.e. real, saved resources) relies on the interest rate to facilitate his calculations of which allocations are profitable (by discounting in the present the future value expected to be generated by the various investments). He also uses money as a unit of account and its availability as a proxy for the availability of the real resources this money is supposed to represent. We can now realize that if the money (or credit) is not backed by real resources, if its value is subject to a constant, subtle erosion and if the rate of interest does not truly reflect the real society-wide time preference rate then the investor can very hardly avoid making a mistake in his calculations.

It also becomes clear that the higher stages of production will be affected more by such interferences than the lower stages as the lag between an investment in such stages and the actual production of the final consumer goods is greater and this makes its profitability significantly more dependent from changes in the rate of interest (since the period to be discounted using that rate is longer).

Recalling the fact that investing in higher stages is more resource-consuming, we can see how these false signals that encourage investments in these higher stages in the absence of the required amount of saved-up resources are especially pernicious, as they deprive the economy of significant amounts of real capital that may have been used to satisfy far more pressing needs (as an example think of all the stuff that gets used up and all the people that are employed when building one of the famous “stimulative” bridges to nowhere). Moreover, when it is discovered that the required resources the existence of which was feigned do not actually exist, the re-adjustment process becomes inevitable (i.e. the bubble bursts).

Proof of our assertions can be found in the fact that, as far as we know, we have not once seen or heard of a bubble in greengroceries, with people rushing to open up stores to sell apples and bananas to frenzied consumers (as the grocer buys the groceries wholesale at dawn and sells them throughout the day and does not need any particular capital equipment to carry out his job, he is basically immune from manipulations of the rate of interest, although as readers can see in the article linked in the next paragraph overconsumption takes place during a boom as well and is then inevitably followed by “forced savings” and this inevitably affects the latter stages). On the other hand, we’ve been to many cities with office and residential towers popping up like fungi and where we could see a real estate agency on every corner (or even more often) and meet deluded people who were happy to share their dreams of boundless wealth (of course, they only needed RE prices to go just a little bit higher).

We want to make an additional and apodictic consideration (although we do provide a link here for those who want to further examine the argument): the stage of the production structure most neglected during the boom phase is the middle one.

And with this we end our brief introduction, again stressing the need for way more thorough investigation of the matter on the part of interested readers.

Old Europe

Let’s begin with where we live, the wonderful continent of Europe. Readers interested in knowing more about it, in a heavily stereotyped (and hence fun) way, can watch “Jeremy Clarkson meets the neighbours”: here is the link to episode one!

Netherlands

Here we start with a massive one! It seems to us that the Dutch are suffering from Tulipomania-related nostalgia and as such have been busy blowing a new bubble, and one for the ages!

Household debt to GDP as well as household debt to disposable income ratios of 250% and skyrocketing home prices: an explosive combination! The end result is one of the most overvalued RE markets in the world, that lately clearly appears to be faltering. With 650 billion € of RE loans outstanding, stockholders, bondholders and depositors at Dutch banks beware: you may get Cyprus’d before you know it, as our beloved Reggie often reminds to the Irish!

Interested readers can find more info here, here, here and here.

Two Charts depicting the performance of the Dutch housing market in recent years, via Global Property Guide.

A wee bit of debt currently on the balance sheet of Dutch households, from the previously linked Acting-Man post.

France

Ze French would obviously not tolerate to be left behind by anybody (ah, la grandeur!) and so here we have them, with their RE market right on top of the list of the most overvalued in the world. Depending on the valuation measure used (whether disposable incomes or rents), prices are roughly 35-50% above their long-term average ratios, which means that, according to the law of the pendulum, they are likely to go quite a bit below said average ratios once the bubble pops. We wouldn’t be surprised to see prices at least halve over the course of the coming years, particularly if Monsieur Hollande keeps acting like a lunatic (let’s be honest: he looks like one, doesn’t he?! Have a look here!). It’s interesting to note that in Paris and in the surrounding region overvaluation is even more extreme, likely due in part to the economic and political importance of the area and in part to the huge influx of foreign money (this resembles the situation of London in the U.K., see below). No Pétrus for recent buyers, that’s for sure! A marked slowdown in building activity and a recent decline in sales (which turned into a 44% plunge in the number of transactions in Paris), accompanied by a modest reduction in prices may signal that the party is rapidly ending (readers need to remember here that prices are the last component to deteriorate, with construction activity and more importantly sales acting as early-warning signals). Interested readers can learn more here, here, here, here and here.

French home prices relative to disposable income, divided per region, chart courtesy of CGEDD.

Belgium

Even the tiny country of Belgium has managed to blow a rather sizable RE bubble, with remarkable levels of overvaluation. Interestingly, the market seems to be giving only feeble signals that the unwinding process may be about to begin: prices continue to creep higher (albeit not in Brussels), with the only warnings being a slowdown in construction activity and a decrease in mortgage issuance. We do however doubt that the Belgian bubble could be able to withstand a popping of neighbouring bubbles (France and Netherlands) and/or a new iteration of the global financial crisis (which, as readers of this blog know, we consider to be baked in the cake). Interested readers please have a look here and here.

  Belgian house prices: still no sign of collapsing. Chart via Global Property Guide.

U.K.

The U.K. also sports a severely overvalued RE market, with London being one of the most expensive cities in the world when it comes to buying a house. Prices are at least 30% above their historic valuation ratios. Of course, British blokes are up to their eyeballs in debt (in the Greater London area mortgage servicing takes up on average a whopping 35% of income). And quite naturally the government feels compelled to encourage even more reckless borrowing (we want to reassure the author of the linked article, as there’s no risk of creating a new RE bubble: there already is one that is alive an well!). So far no major warning shots have yet been fired by the market (although there has certainly been a slowdown), however we encourage current RE owners not to feel too safe, as the foundations of the bubble are clearly shaky ones and a new recession or a financial shock may very well prove to be the proverbial nail in the coffin. Other, more detailed information can be found here and here.

 

The dizzying chart of U.K. real estate prices, via Global Property Guide.

Switzerland

Even the famously dull Swiss have not resisted the temptation of engaging in a massive real estate binge, thanks in part to the mental policies of the SNB (zero rates and a money printing bonanza designed to stop the “harmful” rise of the Franc) and the large inflows of scared foreign money in search of a safe haven (and which may have ended up finding a grave). The result is a horrendously overvalued market where interest-only mortgages are common practice (otherwise many chaps could not even begin to think about buying a home) and where many cities and popular resort towns now sport some of the highest prices per square meter of the whole orbis terrarum. And so the secluded alpine country, famous producer of excellent chocolate and cuckoo clocks of dubious taste, is now drowning in debt, to the tune of 175% of disposable income. Again, there are no clear signs that the end may be approaching. In fact, it seems like the bubble is currently accelerating into its final blow-off stage. Readers are invited to read more here, here, here and here.

A chart of RE prices in Switzerland, which conceals the astonishing increases witnessed by some of the major cities.

Sweden

Even the supposedly safe Northern European countries have taken part in the global RE bubble and they’ve done so with much gusto, as we shall see here. Starting with Sweden, we want to mention that prices have now begun to decline moderately, after having experienced an incredible run-up (more than doubling in the last decade). However RE is still severely unaffordable and at the very least 20% above its long-term average valuations. A household debt-to-income ratio of roughly 175% completes the picture. Signs of a slowdown are now present, but not yet obvious. For more on the topic please click here, here, here, here and here.

Housing prices in Sweden: now beginning to decline after coming close to a triple in less than two decades.

Norway

Norway is not in much better shape than Sweden. Arguably, the situation there may even be worse, due to the fact that its bubble has grown significantly larger than Sweden’s. Proof can be found in the fact that households now sport a debt-to-income ratio grater than 200%, not to mention that RE prices may be as much as 70% above their long-term averages, depending on the valuation metric used. Socialist paradise anyone?! Particularly worrying is that fact that so far there have been few if any signs of More facts can be dug up here, here, here, here and here.

Honestly, we can’t see a bubble here, can you?! A mere tripling in 15 years can’t count as one! Via Global Property Guide.

Denmark

Apparently even the almost inconsequential country of Denmark has managed to blow its own RE bubble and to make sure it was noticed abroad it made it egregious. Maybe exponentially-rising home prices have helped the Danes cheer up a bit, but don’t hold your breath for it. In any case, the solution to the supply-demand imbalance appears simple to us: just build a few Lego houses! Household debt is more than 300% (yes, that’s not a typo) of disposable income and house prices have almost tripled in the last 15 years. Also of note is the sheer size of the nation’s mortgage market: 600 billion € ready to blow up in the face of not very smart holders. The bubble here has clearly burst and the real fun is just beginning, as both the government and the banks scramble to find a way to keep the ponzi scheme going. More info here, here, here, here and here.

The party has clearly ended in Denmark: now it’s a question of who’s going to eat the losses. Chart via Global Property Guide.

Finland

We terminate our overview of European RE markets with Finland, which also has its home-made bubble, although maybe less egregious than those of its neighbouring countries. Debt-to-income is “only” a bit above 100%, but home prices have almost tripled in the last 15 years. As of late the bubble seems to be wobbling, with price appreciation having slowed down markedly. Readers can continue their research here, here and here.

House prices in Finland, via Global Property Guide.

Down Under

We now move to the Southern Hemisphere.

Oz

Australia is where one of the most egregious RE bubble in the world has popped up, thanks in part to the commodities boom and to an enormous credit expansion. Houses are now at the very least 30% overvalued (with 40% to 50% being a more credible estimate), with cities such a Sidney sporting some truly ridiculous prices. Household debt stands at 150% of disposable income and most of it is mortgage debt, which the fractionally-reserved banks have very generously offered to the usual muppets who could ill-afford it. No problem though: skies are clear and prices keep on rising like there’s no tomorrow! Actually, they don’t: prices have stalled and have now begun to decline, although at a moderate pace. Their decrease is accompanied by a sharp decline in the number of sales and a marked slowdown in construction activity: it seems to us that the unwinding has begun, particularly given that China is now beginning to crumble as well (more on the topic below). Plenty of links for the passionate investigators: here, here, here, here, here, here, here, here, and here (where the author shares his delusion that prices cannot possibly collapse since, among other things, they may have “plateaued”: 1929 anybody?!).

Prices in Australia have now begun their long trip down, via Global Property Guide.

Debt to disposable income ratio for Australian households: pretty high and most of it is mortgage debt. Chart from one of the articles linked above.

New Zealand

Apparently, the Aussie’s neighbours aren’t doing much better. In fact, it seems they’re currently experiencing the final stage of the bubble, with relatively brisk price increases across the board and some signs of a looming slowdown. Of course, the debt to income ratio stands at a quite buoyant 150% and prices are at least 25% overvalued, but may be as much as 65% more expensive that their long term average. Our guess is that when the Australian housing market finally sneezes the NZ is going to catch a cold. More information can be found here, here, here, here, here, here, here and here (again, delusional – or maybe self-serving - comments about the non-existence of the bubble).

NZ house prices, via Global Property Guide. And they have the audacity to claim that there’s no bubble?!

Here we have the usual wee bit of debt. Via one of the previously-linked articles.

South Africa

We have decided to include South Africa simply because we had the chance to visit it right at the height of its massive RE bubble and we enjoyed looking at then-current listings (referring to them as totally ridiculous is a huge understatement) and chat with a few chaps there about the market and we returned home deeply satisfied, with the persuasion that the market was headed for a decade or more of Buddhist-like nothingness. And in fact it seems like we were spot on, as prices have gone pretty much nowhere during the last few years, notwithstanding a relatively significant depreciation of the currency. But now it seems like the globalized inflationary race has begun to work its wonder on SA as well, with prices again starting to increase at a quite rapid pace. Whether this is just a temporary phenomenon or the beginning of a new bubble still remains to be seen. In any case, as much as SA is a lovely country, we wouldn’t buy a home there. Debt to disposable income stands at 76%, but remember that a large part of the population cannot possibly think about borrowing as they’re too busy surviving. Further info can be accessed here, here, here, here and here.

                                                             

House prices in SA and YoY % change in nominal and real terms, via Global Property Guide.

North America

We’ll now quickly review the state of the housing market in the U.S. and Canada. It’s worth mentioning that Bernanke is “successfully” (depending on how you define success) re-inflating the once-burst U.S. housing bubble. Of course this is bound to generate even deeper distortions and dislocations in the economy’s structure of production. It won’t end merrily.

U.S.

The witch doctor, alternatively known as Fed Chairman, Ben S. has managed to re-start many bubble activities that were justly interrupted in the wake of the 2008 collapse. Of course this has happened at a grave cost, as unsustainable and ultimately unprofitable capital-consuming activities continue to be allowed to take place, at the expense of everyone in the economy. Housing is of course chief amongst these bubble activities and the market has experienced a strong rebound. Whether it’s going to survive the coming crisis is of course highly questionable. In the meantime, ever more people are getting sucked in, ready to be spit out in pieces once the downturn arrives (and it always arrives, although it often takes longer than anticipated). It should be clear that this whole process does nothing but inherently weaken an economy. Anyway, let’s review some data: debt to disposable income stands at 115% (whereas household debt to GDP currently is close to 90%), home prices are increasing at the fastest pace since 2006 (which was pure bubble territory) and median nominal prices for new homes are again at levels close to those registered at the last bubble’s peak. You draw your own conclusions! Here, here, here, here, here, here and here readers can find more information. Moreover we recommend this blog and all the articles published at Acting Man by guest author Ramsey Su.

U.S. home prices have begun to creep up again: a new bubble is forming? Via Global Property Guide.

Median U.S. new home prices: back in bubble territory. Chart taken from this article.

Canada

Here we have another contestant for the top prize in the category “Most overvalued RE market in the world”! Again, the culprit is the reckless monetary policy of the central bank, which has allowed bank credit (i.e. credit that is not backed by real resources) to boom. The global commodities boom has also helped in fuelling the bubble. The result is that now Canadian households have a debt to income ratio above 160% and home prices are at least 35% overvalued (but the figure may very well be significantly higher, maybe even in the vicinity of 80%). Warnings signs have begun to appear as of late, with construction activity slowing down, sales number continuing to significantly deteriorate and a series of six uninterrupted monthly price declines. More information can be found here, here, here, here, here, here, here, here, here, here, here, here, here, here, here and finally here (look at his bright face and then ponder whether his “well-reasoned” arguments hold any value).

Canadian home prices via Global Property Guide: up, up and away!

Rest of the World

Let’s now quickly review the state of the housing market in a few more countries, before drawing our conclusions. We wan to to briefly mention that both Dubai and Hong Kong, by keeping their currencies pegged to the U.S. dollar, basically adopt the Fed’s monetary policy. As a result, their RE bubbles are sort of echo bubble, magnified by the relatively small size of their economies and by the huge foreign capital influxes. On the other hand, both Singapore and Hong Kong sport very low taxes and a remarkable level of economic freedom and are thus engaged in true wealth generating activities, which to a marginal extent mitigate the impact of the bubble.

Dubai

We couldn’t avoid mentioning Dubai, as it’s arguably the most absurd place on the earth, a big playground for His Highness Sheikh Mohammed bin Rashid Al Maktoum, a child at heart with gobs of money at his disposal. "The word 'impossible' is not in leaders' dictionaries. No matter how big the challenges, strong faith, determination and resolve will overcome them.". Sure, we mere mortals can’t argue with such words of wisdom, but in the meantime we humbly suggest to include the world “bubble” in the aforementioned dictionary (“debt restructuring” is already in it). Oh, and we happen to have a nice bridge to sell, should His Highness be interested!

We were in the city of dreams (which may become nightmares) recently and we were delighted to see cranes all over the place: 2008 hasn’t taught the morons a thing! In fact evidence seems to suggest that there currently is a new speculative mania underway in Dubai’s property market. Proof of the foolishness of such RE frenzy lies in the sheer number of empty units. Again, we seriously doubt it could survive a resurgence of the 2008 financial crisis. The only mitigating circumstances are the absence of taxes and the relative degree of economic freedom, which, in an increasingly more totalitarian world, appear as ever more valuable features. More info here, here, here, here, here and here for a bit of colour!

Singapore

Singapore is another very overvalued RE market (with the only caveat mentioned above), with prices roughly 50% above their long-term average according to The Economist. Signs of a slowdown are present, although we haven’t still heard a clear popping sound. Interested readers can have a look here, here, here, here and here.

                                               

                                           

House prices in Singapore and their YoY % change, via Global Property Guide.

Hong Kong and China

Hong Kong is probably the single most overvalued RE market in the world, with Canada the only true contestant for the top spot. Prices there have tripled in less than a decade and are now roughly 70% overvalued. We explained the dynamics of the bubble above. We just want to add that the market is now in a manic blow-off stage, with prices increasing more than 20% in the last year. If we had a house there we would be rushing to sell it, not now but yesterday! Further information can be found here, here, here and here.

                                           

                                                 

Hong Kong RE prices and their YoY % change: a sheer bubble is glaringly obvious. Charts from Global Property Guide.

China is a bit of a different story, quite complex and murky. We won’t analyze the market in detail here (although we do not rule out doing it in a future post): we’ll just provide some basic info and a quick overview. Real estate speculation is the national sport there and it’s also the main tool the all-knowing wild bunch of bureaucrats ruling the country uses to achieve the desired level of “growth” (i.e. an orgy of malinvestments mistaken for a mirage of prosperity). Leverage is also present in spades, notwithstanding the usually benign official statistics, thanks mainly to the so-called “shadow banking system” (i.e. a colourful potpourri of moneylenders, pawnbrokers and loan sharks). The picture is completed by the by-now famous “ghost cities”, imposing monuments to the utter madness of which humans are capable. Signs of a slowdown are present, but not yet unequivocal. It is however important to note that our Mandarin friends do not stand out for their transparency. Interested readers are welcomed to learn more here, here, here, here, here and here.

Property prices in China have experienced a “healty” increase in the last decade, via Global Property Guide.

An interesting documentary on China’s ghost cities.

Conclusion

It should be clear by now that the world at large is in the midst of an egregious real estate bubble (actually bubbles are pretty much everywhere and not only in RE, hence Jesse Colombo’s apt definition of this epoch as The Bubble Bubble, a bubble of bubbles). We have of course not covered all the countries in the world, but readers should have developed a taste for what it’s like. Those who are willing to spend some time doing further investigations can take a look at India or other emerging markets and see whether they can see any differences with the countries presented above. The takeaway is clear in our opinion: wherever you are, think twice before buying a house! Interesting speculative opportunities also abound, as shorting the stocks of banks that are heavily exposed to bubbly RE markets is likely to prove profitable, provided it’s done in an intelligent way. Exercising patience is always necessary though, as many of these bubbles could keep on going for quite some time, especially given the reckless policies currently implemented by global central banks (and we have them and their fractionally-reserved cronies to thank for this mess). Warning signs abound in many cases, but timing is always the tricky part. And of course there’s no substitute for doing your homework.

As a final note, we’re generally not prone to self-praise, but assembling this post has really been yeoman’s work and we hope that our readers will appreciate it and if so help spread it to a wider audience.

“You know, it’s a Bull Market!”

The wise words of old Mr. Partridge undoubtedly apply today to both Gold and Silver and the objective of this post is to outline the main fundamental reasons that determine the metals’ long-term bullish trend. We will also provide a brief overview of the current technical/sentiment situation, which is in our opinion neutral to slightly positive. We’ll focus mainly on gold, but much of what we’ll say applies to silver as well, with the important caveat that the poor man’s gold is much more volatile than the yellow metal and its performance is more strictly dependent on the ebb and flow of speculative demand.

Before starting, however, we have to ask an important question: is gold money? The answer is yes and no. Yes, because it possesses certain characteristics that make it fit for the role of money, the very same characteristics that prompted its use as a medium of exchange in ancient times (see Carl Menger’s seminal work on the origins of money). These features cannot be stripped away from gold by means of government decree: it will continue to hold them and people will continue to be attracted to them whenever and wherever the need for sound money will arise. No, because money is correctly defined as “the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market (Rothbard, Austrian Definitions of the Supply of Money)”. Clearly, you can’t pay for petrol with a nice gold bling-bling (unless maybe you happen to be a gangsta rapper). We must therefore keep the above in mind when analysing gold and the determinants of its price. We may sum the above concepts up by saying that gold is a commodity until it isn’t.

A final note on the usage of some words: when talking about gold we’ll use the terms money or the money commodity, whilst when referring to the fancily coloured pieces of nothing that we all keep in our wallets we’ll use the terms paper money or fiat money.

The Fundamental Backdrop

A) A brief introduction to the Austrian Theory of Money

As hard-core Rothbardians, we are of course biased in our assessment, but let us tell you: the Austrian Theory of Money kicks ass! Well, at least in the realm of economics…

In this field, the main achievement of the Austrian School (hat tip to Ludwig Von Mises) has been the successful application of Marginal Utility Theory to the analysis of money, its demand and its value. This has allowed the Austrian School to treat money like all other goods (even though it clearly recognizes money’s peculiar function and its specific characteristics) and thus offer a comprehensive and coherent body of economic theory based on the laws of praxeology and the action axiom. As Murray Rothbard so aptly put it: “No longer did the theory of money need to be separated from the general economic theory of individual action and utility, of supply, demand, and price; no longer did monetary theory have to suffer isolation in a context of "velocities of circulation, " "price levels," and "equations of exchange".”

The supply and demand relationship can thus be represented graphically in the usual fashion (total demand-stock analysis): a falling demand curve intersects at a certain equilibrium point (where supply and demand meet) a vertical line which represents the total stock of money at the given time. On the horizontal axis we find the quantity of money (its supply), increasing rightwards, and on the vertical axis its price (in this case the purchasing power of money or PPM), increasing upwards:

We can’t refrain here from singling out the economic ignoramus Antal Fekete, founder of the “New Austrian School”, and his equally ignorant disciples, who claim that money doesn’t have declining marginal utility (or if it has it, its rate of decline is “negligible”): this is hogwash and we wonder how come they still use the adjective “Austrian” when they reject one of the core tenets of the Austrian School and thoroughly ignore one Mises’s most important contributions to economic theory. Not really surprising: after all they’re a bunch of monetary cranks and their ignorance certainly does not limit itself to the above.

B) Supply of and Demand for Money and their determinants

1) The Supply of Money

The supply of the money commodity tends to grow steadily and modestly over time: each year mining adds a small percentage to the total stock, whilst non-monetary uses and wear and tear reduce it. Fiat money on the other end is conjured into existence by the Central Bank and the Banking Cartel, either via outright money printing or via the more subtle process known as fractional reserve lending. They can increase its supply at will and, since the process allows the early recipients (the banks themselves, big business and the the well-off) to gain at the expense of the late recipients (workers, pensioners etc.), they are likely to do so.

It is obvious from the graph above that ceteris paribus an increase in the supply of money will determine a decrease in its purchasing power and vice versa.

2) The demand for Money

The demand for money has three subcomponents.

A) Non-monetary demand

This is the demand to use the money commodity for purposes other than monetary exchange (e.g. the use of gold in electronic circuits). If gold were actually used as everyday money, this demand would very likely be lower than it currently is, as the opportunity cost of using the metal would probably increase sharply. In any case, even now, as the price of gold increases, non-monetary demand tends to decrease, as the opportunity cost rises. Silver is much more dependent than gold on the vagaries of such demand.

Obviously non-monetary demand is nonexistent in the case of fiat money (apart from tragicomic situations: e.g. people in Weimar burnt marks in the stove as they were cheaper than wood).

B) Exchange demand for Money

This is the demand to acquire money for exchange purposes by sellers of other goods and labour: people sell their surplus in order to obtain money with which to engage in indirect exchange (thus avoiding the limits of direct exchange, a.k.a barter). Sellers of goods will tend to have a perfectly inelastic demand curve (as they have no reservation use for their goods), whilst sellers of labour will have a falling demand curve (since they could always trade work for leisure): the combined exchange-demand curve for money is thus falling (as the PPM increases, the exchange demand for money falls). It’s clear that in the current situation, this demand is almost nonexistent for gold (nobody asks to be paid in gold for his work). It is however an important determinant of the value of fiat money, given that this demand exists only as long as paper money is the accepted medium of exchange.

C) Reservation demand for Money

The third subcomponent is the most volatile and thus most important one: it is the demand to hold money by people who have already acquired it. Money acquired on the market (by selling goods or labour) can be spent, either on consumption goods or investment goods, or added to one’s cash balance. Money already in the cash balance can either be kept there or dishoarded (i.e. spent on consumption or investment goods).

Ceteris paribus an increase in the PPM will result in a reduction in reservation demand (as the value of money in terms of other goods increases, a lower quantity of money can now perform the same functions earlier performed by a greater quantity) and vice versa. There is an extremely important exception to this rule and that is when the Misesian crack-up boom appears: as people become aware of the deliberateness of the inflationary policy, their reservation demand to hold paper money falls dramatically as the money supply increases, thus exacerbating the inflationary crisis (see also further below). This of course can’t happen to gold, unless we were to really find the philosopher’s stone.

We will see below what could alter people’s decisions to hoard or dishoard money (i.e. what could cause a shift of the reservation demand curve, as opposed to a simple movement up or down the current demand curve as in the example above), but it’s important to note that the values of both the money commodity and fiat money are heavily influenced by such shifts in demand.

3) Influences on the reservation demand for Money

All people familiar with praxeology know that it is of course impossible to formulate a law that precisely and quantifiably predicts how economic actors will react to given changes in the surrounding reality, as each man has his own scale of values and preferences and is constrained by his own set of circumstances. The deluded refusal to acknowledge this simple fact of life is also know as “Mathematical Economics” or “Econometrics” and has so far only managed to produce untold misery, by way of justifying idiotic interventionist policies with fancy “scientific” formulae.

It is however possible to infer certain general “rules of thumb” that can help us in making qualitative assessments on a certain situation. With that in mind, let’s see what can have a meaningful influence on people’s reservation demand for money and, as a consequence, on the value of money itself.

A) Uncertainty

Life is uncertain. We do not know what the future holds. But what if we were suddenly catapulted in a world of certainty, in an Evenly Rotating Economy (ERE) where equilibrium has been reached and nothing can possibly change (i.e. all prices are final prices and remain constant, production and consumption patterns repeat over and over again etc.)? What would happen to money in such a case? We’ll let Rothbard answer these questions:

“It is true, as we have said, that the only use for money is in exchange. From this, however, it must not be inferred, as some writers have done, that this exchange must be immediate. Indeed, the reason that a reservation demand for money exists and cash balances are kept is that the individual is keeping his money in reserve for future exchanges. That is the function of a cash bal­ance—to wait for a propitious time to make an exchange.

Suppose the ERE has been established. In such a world of certainty, there would be no risk of loss in investment and no need to keep cash balances on hand in case an emergency for consumer spending should arise. Everyone would therefore al­locate his money stock fully, to the purchase of either present goods or future goods, in accordance with his time preferences. No one would keep his money idle in a cash balance. Knowing that he will want to spend a certain amount of money on con­sumption in six months’ time, a man will lend his money out for that period to be returned at precisely the time it is to be spent. But if no one is willing to keep a cash balance longer than instantaneously, there will be no money held and no use for a money stock. Money, in short, would either be useless or very nearly so in the world of certainty.” (Rothbard, Man, Economy, State with Power and Markets, Chapter 11)

Luckily though we do not live such a dull existence, but a more spicy one. And, as Rothbard says:

“In the real world of uncertainty, as contrasted to the ERE, even “idle” money kept in a cash balance performs a use for its owner. Indeed, if it did not perform such a use, it would not be kept in his cash balance. Its uses are based precisely on the fact that the individual is not certain on what he will spend his money or of the precise time that he will spend it in the future.” (Rothbard, Ibid.)

It is therefore clear that uncertainty plays an important role in determining people’s reservation demand for money. It is safe to say that, ceteris paribus, an increase in uncertainty will most likely cause an increase in the reservation demand for money. This is intuitive: what do you do when you are faced with an economic emergency (e.g. you lose your job or your business fails, or you are faced with a large unexpected expense)? The most likely answer is: you raise cash, that is you either restrain your consumption or you sell your investments or a combination of both. The same holds true when such an unforeseen event affects all or the vast majority of people (e.g. an economic crisis, a bear market, a war, acts of god etc.): in the face of growing uncertainty people generally choose to increase their cash balances (i.e. their reservation demand curve shifts to the right).

Now we guess we don’t have to tell you what might go wrong in a world where increasing state intervention in the economy, endless money printing, gigantic malinvestments and growing social unrest rule the day…

B) Speculation

This is an easy point to make: if people expect the value of money to increase in the future, they’ll increase their hoarding now (i.e. their reservation demand will shift to the right), thus bringing about the change in the PPM in the present. Of course the opposite is true as well: “an expected future fall in the PPM will tend to lower the PPM now.” (Rothbard, Ibid.)

This is what has recently happened to the Yen: speculators anticipating massive devaluation of the currency by the BoJ rushed to sell it, thus causing the fall to occur in the present. Unfortunately for them, all the relevant data point to a rather serious misunderstanding of the BoJ’s real intentions on the part of the speculators. But no worries: erroneous speculations are self-correcting, not self-fulfilling as the minions of the State would like us to believe. Correct speculations, on the other hand, are beneficial as they speed up the market’s adjustment to the new equilibrium conditions.

In the case of gold, it is not difficult to see what could happen should a renewed economic crisis wreck havoc à la 2008/2009 on U.S. government finances at a time when debt and deficit monetization by the Fed and foreign central banks is already rampant, both in absolute and relative terms:

 

 

YoY Percentage Change in U.S. government Receipts and Outlays superimposed to a 12-month rolling measure of the Deficit. Chart via Michael Pollaro. Could that nasty divergence happen again? Of course it can: we only need a nice crisis! Problem is, the deficit’s current level is already way higher than in 2007, both in absolute and relative terms.

 

The result of the U.S. government profligacy is a record-high level of debt monetization on the part of both the Fed and foreign central banks. Guess how they finance their purchases?! And what if they have to buy even more, due to resurgence of the 2008/2009 dynamics outlined in the chart above?! Again, thanks to Michael Pollaro!

 

In the case of the dollar it’s certainly more difficult to foretell what the market’s reaction to such a situation might be, as people’s reservation demand to hold it ultimately rests on a precarious foundation, as Mises pointed out in Human Action:

“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796 and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last forever.”

As such we can by no means know in advance whether the next crisis and the official response to it, likely constituting of a large dose of new inflation, are going to determine a shift in people’s perceptions dramatic enough to seal the fate of the dollar. In fact, we tend to doubt it. What we are strongly convinced of is that although the dollar could very well gain in value against other currencies, it is unlikely to make much progress, if any, in terms of gold.

4) A real-life example: the panic of 2008

Now that we have described the components of the demand for money and their main determinants, let’s see if we can manage to explain, using these instruments, what happened to both gold and the dollar in 2008.

Between July and November of 2008 the value of the dollar increased more than 20%, whilst the price of gold plummeted more than 30%.

The reservation demand for the dollar was clearly pushed to the right by both uncertainty and speculation that deflation would increase its PPM.

The case of gold is a bit more complex, as there were opposing forces at work: on the one hand, its price declined as speculators bet on a deflationary outcome; on the other hand, uncertainty pushed many people into the market (as demonstrated by the record surge in GLD holdings at the height of the panic, between September and October, which not accidentally coincided with Lehman’s bankruptcy). Once the deflationary scenario proved to be incorrect, its price soon returned to equilibrium: gold was by far the fastest asset to regain its pre-panic value and by February 2009 it was already close to it previous all-time high. It’s also important to note that during the panic it did either gain substantially or lose modestly against other currencies (with the exception of the Yen) and it also increased its PPM when measured against other goods (like e.g. crude oil, copper, equities etc.). Even if the deflationary outcome had come to pass, we suspect that gold would have not continued to lose value against the dollar, but its price would have most likely stabilized or even increased, as uncertainty would have become even greater as the financial system would have rightfully collapsed, thus pushing more and more people in the gold market at a time when sellers would have probably been rare (in fact the “Lehman demand” did indeed generate a meaningful rally in the price of gold). In any case it would have most certainly gained immensely in real terms (i.e. when measured against other goods, like houses, cars, food, energy etc.).

We can then conclude that both gold and the dollar benefited from an increase in people’s reservation demand for money, with the former temporarily succumbing to speculative forces (which subsequently self-corrected) and the latter of course profiting from its status as reserve currency (as well as the deflationary scare).

When the next crisis strikes, we fully expect gold to experience an even greater increase in reservation demand, as uncertainty will again increase and probably quite dramatically, given how unquestioningly people have put their faith in central bankers and their monetary tricks. Should (when, actually) the modern-day heirs of Count Cagliostro fail in bringing about prosperity by means of inflation, what would the poor saps do? Buy gold, that is. Moreover speculative forces should now be firmly on the same side, as it’s apparent that the default response to every problem is to “paper it over”.

C) Popular fallacies regarding Gold and its Bull Market

In light of the above, we can now embark on debunking some popular fallacies about gold and what drives its bull market.

1) Gold is a commodity

Although, as we have seen above, gold is not entirely money at this point in time, it is erroneous to then assume that it’s just your average commodity: it isn’t. And it follows that it’s dangerously misleading to apply conventional commodity-style studies to the gold market. Firstly, the existing stock dwarfs annual production, thus rendering traditional supply-side arguments useless (unless one correctly recognizes that the supply of gold is indeed its existing stock and not the annual mining output); secondly, as we have outlined before, there exists a reservation demand to hold gold, which is almost nonexistent in the case of other commodities (i.e. we have yet to meet sugar bugs or coffee hoarders) and which upsets standard demand-driven analysis that focuses just on those who want to acquire gold (without considering the far more important influence of those who already own it and want to keep it). This is always true, but becomes even truer when gold is, as is the case now, in a secular bull market, because it is at this precise time that gold takes on its monetary role with far more authoritativeness than before.

2) Indian demand and Chinese demand

The misconception that Indian or Chinese buying is an important force behind this bull market is the offshoot of the above “Gold is a commodity” fallacy. The reality is that there is more than enough gold available to meet both Indian and Chinese demand and the price at which it will do so depends not so much on the size of such demand as on the reservation demand of those who hold it (and have to sell it to the Indian or Chinese buyers). This is no surprise for those who understand that price is set at the margin.

Sceptical readers might want to peruse the data published by the World Gold Council and see whether they can find any significant correlation that lasts over the years between the vagaries of Indian and/or Chinese demand (or even global demand for that matter) and the gold price.

D) Miners ≠ Gold

That mining companies are different from gold is a truism. From this it should logically follow that the reasons to buy (or hold) gold are unlikely to also constitute valid reasons for buying mining companies. And yet many people view an investment in said companies as a way to somehow “leverage” their exposure to gold’s gains: the sad reality is that more often than not they only manage to leverage gold losses, while underperforming its gains. Sure, miners can and often indeed do rise together with gold, sometimes even exceeding its advance, but the reality is that people buy and hold gold to satisfy very specific needs that can’t be fulfilled by owning miners and the stronger these needs grow, the larger the discount at which mining companies trade relative to gold is bound to be. And this does not even begin to address all the myriad specific risks and pitfalls that mining companies present to investors…

Readers wanting factual proof of this need to look no further than the last big gold bull market of the ‘70s: at their respective peaks at the beginning of 1980, both gold and silver had outperformed the miners (as represented by the Barron’s Gold Mining Index) by a wide margin (gold returned almost 4 times more than the BGMI and silver almost 6 times more). Once the bull market ended (and so did the particular reasons to own precious metals) miners did skyrocket higher, doubling in less than a year an peaking in October 1980, as their profit margins were indeed being boosted by still very high gold prices (and yet their total return for the bull was still less than half that of both gold and silver).

Of course peddlers of mining stocks or of investment newsletters of questionable quality will point out to some specific miners which indeed saw returns higher than the metals, but the fact remains: an average investor would have been much better off owning the metals outright rather than owning miners or, worse yet, trying to turn himself into a superstar stock-picker (remember that the aforementioned peddlers have the benefit of hindsight).

That said, miners are indeed very oversold and very cheap at the moment and as such they might present a legitimate investment opportunity. Yet, we are not interested in taking it: we own metals primarily for safety and mining companies do not offer it. Moreover, history is on our side and we should see returns way in excess of those delivered by the miners. And after all is said and done, we could always buy them after the end of the bull and maybe still manage to reap gains larger than those of all the people who kept them for the whole period… We do not however exclude the possibility of trading miners, particularly at this very juncture, as their risk/reward profile appears excellent (in fact, we’re currently busy analysing a few mining companies).

E) The ‘70s Bull Market vs. the current one

We have already mentioned what happened to gold and silver relative to miners during the last bull market. There are however a couple other points worth mentioning that explain why we think this bull market is going to deliver larger gains than the past one and with lower drawdowns.

1) In the ‘70s, Gold had just started to trade freely

The bull market in gold officially started in 1966 (the year of the Dow/gold ratio high), but until March 1968 its price was artificially suppressed by the infamous London Gold Pool, which of course miserably collapsed as soon as market forces became too powerful for the high priests of interventionism to counter (by the way, the Gnomes of Zürich have to thank this fateful event for their now buoyant local gold market). Moreover, artificial pressures persisted until 1971, as the so-called “gold window” (the spread between the fixed gold/dollar exchange rate and the actual market price) allowed some of the shrewdest pool participants to convert their currency reserves into gold at the fixed price of $35/oz. and then sell it on the open market for a nice, risk-free profit. As a result, gold had quite a bit of catch up to do after the definitive end of the Bretton Woods system: it more than quadrupled in less than 3 years (it broke above 50$/oz. in the spring of 1972 and peaked at the end of 1974 at roughly 200$/oz.). This time around it took gold 7 or 8 years to complete the same feat, depending on whether one considers the 1999 bottom or the 2001 bottom as the starting point. This different behaviour also partly explains why in 1975 gold entered a two-year cyclical bear market that halved its price, whilst in 2008 it only corrected approximately 35% notwithstanding an epic panic and widespread liquidation that literally obliterated many other assets.

If we exclude three brief +20% corrections (two during the powerful advance of the early ‘70s and one towards the end of 1978), the mid-‘70s bear was the only one that occurred during that powerful bull market: apart from that, gold only experienced run-of-the-mill corrections of 15% or less. This should put things into perspective and help calm the fears of all those who are currently expecting 1400$ gold (or lower) on the basis that charts tell them this…The current bull has advanced in a much milder and more regular fashion and has already had four +/- 20% corrections (2003, 2006, 2008 and 2011/2012, the last two qualifying in our opinion as outright bear markets), hence it doesn’t strike us as in need of some sort of collapse to “wipe the slate clean”. The same is even truer for silver, which has always generously purged speculative excesses with 35% to 60% plunges.

The unexpected can of course always happen, but the above is one of the reasons why we tend to think that the current consolidation is all we will see: people waiting for 1400$ gold might end up being disappointed.

2) This time it’s much worse!

This is a quick point: the crisis of the ‘70s was undoubtedly a serious one, but we can guarantee you the current one dwarfs it. We won’t enter into details, suffice it to say that the fundamental backdrop is much less inspiring this time around (think of a secular crisis as opposed to a cyclical one: i.e. we’re now at the end of the rope). As such we expect gold to benefit from a much larger increase in reservation demand and, consequently, in its price.

This contributes as well to our scepticism towards claims that gold ought to “collapse” before being able to resume its advance.

Technicals, Sentiment and Positioning

The technical picture is rather benign for both metals:

Gold chart, via http://stockcharts.com/.

Silver chart, via http://stockcharts.com/.

As can be seen in the charts above, both have been spending quite some time in triangular consolidations from which they broke out higher during last summer. These bottoming processes have been accompanied by rising RSI and MACD indicators, with the latter showing remarkable bullish divergences in both cases. The metals are now in the process of recreating these formations on a smaller scale, significantly reducing their trading ranges in the process (a guarantee that a strong move is in the  makings). Strong support can be found in the 1550/1650$ area for gold and in the 26/30$ area for silver. Major resistance levels are 1800$ for gold and 35$ for silver: anything in between is just noise. Time also plays an important role here: the gold bear is roughly 18-month long and the silver one is approaching the 2-year mark. This all combines into a bullish picture: a long correction/consolidation with positive momentum divergences and strong support right underneath it in the context of a powerful secular bull market doesn’t sound so bad, does it?

So let’s see if sentiment and positioning agree with the above.

The former, as reported by Sentimentrader, is hardly buoyant: the readings on gold are currently below neutrality and actually close to levels only seen at major bottoms, including those of 2008, mid 2012 and December 2011. More importantly, they have been spending there quite some time since the 2011 top: another guarantee that there certainly isn’t any speculative mania going on (and if you still doubt it, then just spend some time on a few PMs forums…). The picture on silver is good, but less rosy: sentiment is below neutrality, but not particularly depressed. Moreover, it rose to relatively high levels during last autumn’s rally. Somewhat counterbalancing this is the fact that during last summer’s doldrums sentiment on silver plummeted to levels not even seen during the outright scary 2008 panic and stayed there for a relatively long period. All in all, we consider the sentiment picture positive and supportive of higher prices.

Positioning, on the other hand, is a bit more mixed… ETFs flows show that there has generally be a slow bleeding away from the precious metals sector, with GLD and GDX leading the way (SLV actually recorded its highest ever daily inflow on the 15th of January). Major bottoms tend however to be signalled by some sort of capitulation selling, where large amounts of money are withdrawn all at once from the ETFs. Rydex funds data also confirm that a notable retreat from the sector on the part of dumb-money investors took place during the recent correction. CoT reports unfortunately do not (yet) agree with the above: although both large and small specs have reduced their gold longs to a neutral level, we still do not see the hoped-for washout. And silver is even worse: both large and small specs continue to hold dangerously high levels of longs. We can only hope to see improved data this coming Friday. We want to point out that this fact does not make us bearish at all: it merely means that there could be scope for further corrections/mini-crashes to flush the specs out of the precious metals market.

A final note: we’ve been delighted to see a resurgence of the historical negative correlation between equities and gold, which was thrown under the bus during this last cyclical stock bull. It’s now obvious that gold is again ready to act as a “risk-off” investment, as it is fundamentally designed to do (and as in fact did in many prior instances, both recent and remote).

Conclusions

We are very bullish on gold and silver over the long term and we hold large positions in both metals (although we are overweight the former as it tends to deliver lower volatility and smoother, more regular returns). We intend to accumulate more should favourable circumstances present themselves (e.g. a washout bottom like last summer’s one or a convincing breakout above important resistance levels).
The current picture is however mixed: on the one hand, it’s clear to us that unless and until a new crisis phase opens up, precious metals will very likely continue to be the speculators’ “discarded toys”, abandoned in favour of hotter assets like equities (which on the contrary are currently sustained by the delusion that monetary hocus-pocus can possibly engineer prosperity); on the other hand technicals, sentiment and to a lesser extent positioning appear consistent with the notion that prices are way closer to a bottom than to a top. This week’s Commitments of Traders will help in ascertaining whether we are indeed ready to turn higher or not, as a marked reduction in speculative fervour is the last important ingredient still missing. We also remain convinced that last summer’s bottom was a major one, as it presented all the important characteristics that generally accompany a meaningful intermediate-term low: it’s very unlikely that it will turn out to be violated this year.
As always, we’ll keep our eyes open to spot important developments, but in the meantime we advise our readers to keep in mind the Golden Rule (“He who has the gold makes the rules”), as we believe it will be applied once again in a not-so-distant dystopian future where central banks’ and governments’ actions actually have consequences (and nasty ones to boot)…And of course we encourage them to engage in their own research!