Washington & Wall Street: Goldbugs, Inflation Hawks & Growth

“I bought gold at $1,400, I buy every month some gold, and I have an order to buy more at $1,300 because I want to keep an allocation towards gold–physical gold–and not stored in the United States at all times.” — Marc Faber, CNBC

The past several months have seen the price of gold slump even as the Fed and other central banks have accelerated their massive expansion of paper money.  Gold is off about 20% so far this year with silver down almost 30%. The old adage–“don’t fight the Fed”–particularly comes to mind now because the US equity markets have been setting new highs during this same period. All of these gains are nominal, you understand, but for terrified American policy makers and investors, nominal is just fine. 

In a conversation with Brian Sullivan of CNBC last week, Marc Faber warned that the recent decline of gold prices is not that significant because there are many ways for inflation to manifest itself in a time of reckless monetary expansion. “The market is going down not because of Greece or the fiscal cliff because there won’t be a fiscal cliff…Markets are going down because corporate profits will begin to disappoint and the global economy will hardly grow next year.”

But global equity markets have not yet fallen, even as growth has slowed. In fact, since the start of 2013, the S&P 500 index has moved up 14% or about 8x the yield on short-term Treasury paper. Banking giant JPMorgan (JPM) has moved almost 20% since the start of 2013, albeit on flat revenue and “record” earnings made possible through heroic cost cutting and other gimmicks. With all that increase in valuation, keep in mind, JPM is just barely trading at book value, this compared with 2x book value prior to the 2007 market meltdown.

Shares of technology giant Apple Inc (AAPL)., on the other hand, have lost more than a fifth of their value over the past five month. Has AAPL suddenly lost its ability to make good products or generate revenue?  No. In fact, over the next year, AAPL will probably show more real revenue and earnings growth than any big bank. But the manic crowd of investors that almost turned AAPL into an asset class of its own have since moved on to the next “opportunity” created by Chairman Ben Bernanke and the Federal Open Market Committee, namely large zombie banks.

The great achievement of the FOMC this year has been to expand the supply of paper money to such a degree that even the equity securities of low or no growth banks can soar like F-15 Eagles. As Brian Wesbury of FT Advisors wrote this week, if you had fallen asleep in October 2007 just before the subprime crisis began and awoke today, the Dow and S&P 500 would both be up high single digits. Consumer price inflation of two percent due to the Fed’s generosity, however, would rob you of two thirds of that nominal return. But notice that Bernanke and his colleagues at the Fed don’t like talking about inflation.

The reason why gold prices have fallen since 2013, in simple terms, is the same reason that precious metals prices went up so dramatically since 2007, namely the Fed. Whether you are talking about high growth tech stocks, precious metals, single family homes or consumer-oriented investments, the current price of these assets has less to do with “value” in a cosmic sense and more to do with the opportunity trade-off between paper money and everything else. 

For now, low interest rates c/o the Fed are driving certain stock prices higher and others lower. Just don’t make the mistake of thinking that the US economy has recovered even half the ground lost since 2007 in terms of jobs and consumer spending. Despite talk of “austerity,” public spending in the US and Europe has exploded but with little tangible benefit for real people. 

No matter how many greenbacks the Fed may print, Chairman Bernanke and the FOMC can’t change the fact that rising taxes and inflation are destroying consumer purchasing power faster than the US economy is growing. Rising public spending empowers bureaucrats, but slows real economic growth and will eventually lead to a collapse in asset prices and consumption. The gold bugs, eventually, will have their day.