Thursday, November 12, 2009

Not So Odd Couple

"As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. ... But the creation of all that money, together with the [Fed's] maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later. ... 'In 5,000 years of human history, gold has been the currency of choice, the store of value, when humans have called into question their governments' efforts to solve problems by running printing presses' and injecting money into the economy, says Michael Avery who helps oversee the $22 billion Asset Strategy funds of asset-management firm Waddell & Reed in Overland Park, Kan. ... Just a few years ago the idea that paper monety was somehow suspect and gold was the best store of value was the province of a frightened few. No longer. In recent months, gold has been pushed to new highs as investors who once considered precious metals archaic have been shifting funds in that direction to avoid a too-heavy exposure to Western currencies", my emphasis, ES Browning at the WSJ, 26 October 2009, link:

I see gold and the Dow rising as manifestations of a decrease in the dollar's value. If stocks, excepting financials, represent claims on real assets, as the numeraire, dollars, decreases in value, gold and stocks should rise as expressed in dollars. This is more terrible reporting from the WSJ, which cannot separate its news and editorial pages.


Anonymous said...

It's getting perilous for Fed magicians.

Soft landing?

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