The Economist’s World in 2012 publication captures one of the big uncertainties for next year – and this one’s a straight either / or, they say:
Somebody is going to be proved wrong in 2012 and will lose a lot of money. Either the bullion market or the Treasury bond market is mistaken about the long-term inflationary outlook.
By early September 2011, gold was trading at around $1,900 an ounce, an indication that investors felt inflation was set to soar. Such an outlook would normally be bad news for government-bond markets. But the ten-year Treasury bond was simultaneously yielding less than 2%, an indication that the “bond vigilantes” were far more concerned about deflation than inflation. Although the gold price fell and bond yields rose in October, the underlying contradiction didn’t disappear.
Gold’s been falling since World in 2012 went to press, especially this week, and is currently below $1,600 an ounce – in large part, market watchers say, because of perceptions that the Fed won’t be turning on the QE printing presses (and hence driving inflation up) any time soon. The deflationary side of the argument will presumably get added momentum from the apparent slowdown in emerging economies: Brazil had zero growth in Q3, Indian growth is falling too, and it’s the same story in China – where as Ambrose Evans-Pritchard observes,
It is hard to obtain good data in China, but something is wrong when the country’s Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control.
The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains. The question is whether the People’s Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.
All this, plus Christine Lagarde warning of a 1930s style slump. Are the goldbugs headed for a massive loss?
Maybe – but I still wonder what will happen next year on the QE front. The European Central Bank keeps disappointing market expectations of large scale bond purchases for now, including after last week’s summit; but it may not be able to continue to do so if the Eurozone’s travails worsen dramatically next year. And the same may be true of the US as well, if things worsen there too. Admittedly, as the Economist notes,
[QE] has become controversial [in the US], with Texas’s governor, Rick Perry, a candidate for the Republican nomination for the American presidency, describing the idea as “almost treasonous”. Nor is it clear that previous rounds of QE did much to help the real economy.
But Rick Perry (and indeed the Republicans generally) look less of a threat to Obama now than they did when World in 2012 went to press; and while QE may indeed not have made that much of a difference, there’s also the fact that policymakers have pretty much run out of other ideas for stimulating the economies (I keep thinking of emergency room movie scenes… “Clear!”… BZZZZT…. beeeeeeeep…)
So on balance I’m still with the goldbugs rather than the T-billers, just about. But who the hell really knows anything about the future, anymore…
