Iranians are scrambling to protect their life savings by buying dollars and gold. Iran’s inflation rate has risen from 8.8%, a 25-year low, to 19.1% last month. The rush out of the Iranian rial has become so bad, the government has asked its citizens to stop buying dollars and gold. The government has warned that foreign exchange rates will fall and gold prices will soon drop: “…those who buy them at high prices should not complain later on.”
For more details see “Government asks Iranians to stop buying dollars” (CNBC, November 19, 2011).
Gold has soared over the last six weeks. I never thought about its impact on manufacturing because I have believed gold is a very minor component of any production process. However, over at Marvell Technology (MRVL), high gold prices are squeezing margins enough to make the company plan switching to copper. From Seeking Alpha transcripts of MRVL’s earnings call on August 18:
“The price of gold has increased from about $1,200 per ounce a year ago, to over $1,700 today. This has eroded our gross margin by about 1.5% in that period. We are transitioning to copper, but this will take some time.”
MRVL also noted that foundry prices have fallen more slowly than expected, and the company is looking for new fabs with better pricing.
Author disclosure: long GLD and GG
CNBC reported that “Adjusted For Inflation, Dollar Hits Fiat-Era Low.” Economists at Deutsche Bank calculated the value of the dollar on a trade-weighted basis and then made adjustments for inflation. Their conclusion is that the dollar is at its lowest point since the U.S. went off the gold standard under President Richard Nixon.
The full article is worth a read but here is a key quote:
“The recent parabolic spike in silver and to a lesser degree gold, shows that the market considers a ‘disorderly decline’ of the U.S. dollar an increasing possibility…”
Gold also looks to continue higher. According to a recent article in Bloomberg:
“Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.”
Disclosure: author owns GLD, PAAS
Suddenly, former Federal Reserve chairman Alan Greenspan knows inflation. In fact, he now sees inflation as a real danger. Greenspan discussed a variety of economic topics with a crew from CNBC. I was quite intrigued, and VERY surprised, at his commentary on inflation and even gold. It is as if retirement has brought on an inflationary epiphany. Stepping away from the printing presses of currency has delivered some remarkable clarity…somehow.
Here are some highlights that were of most interest to me (bold emphasis mine):
- Inflation premiums are building up in the “out years”, but none of these indicators (TIPS, out year treasury yields) will tell you when inflation is about to take hold, and certainly not when the bond markets are going to move.
- In 1979, 10-year treasuries were yielding 9% and all the indicators told prognosticators that yields had peaked because the U.S. was not an inflationary economy – over the next 4-5 months, yields went up 400 basis points.
- Greenspan has always been somewhat skeptical of the output gap – the stagflation of the 1970s proved that “it is not an infallible indicator.”
- The general assumption about measures of core inflation is that food and energy fluctuate, but have no trend. That is incorrect.
- Rising incomes have shifted diets toward more protein, requiring more wheat crops while at the same time we are running out of arable land. This will create a long-term uptrend in food prices.
- Concerns over the security of oil supplies will also put oil prices on an upward trend.
- Over the counter derivatives (futures) have encouraged more storage of oil above ground in developed nations, providing a buffer. Otherwise, oil would be even higher right now.
Greenspan’s commentary on gold perhaps hearkened back to his pre-Fed days when he wrote “Gold and Economic Freedom” back in 1966. The quotes below come from CNBC’s transcript of the larger interview. He made these comments after pointing out that both the euro and the U.S. dollar are flawed fiat currencies (imagine what could have happened in currency markets if Greenspan made such an observation while he was Chairman!).
“What the price of gold is saying, is that there elements within the marketplace that feel very uncomfortable with respect to what is going on generally, and its not an accident that you’re finding that central banks are going in to buy gold and one of the reasons is gold is historically one of the rare media of exchange that doesn’t require any collateral or backing, counter signatures, gold is universally acceptable as a means of payment.”
“I’m not saying we can or should go back on the gold standard, that would be extremely difficult, and it would require such cast changes that this society has made no indication that it wants to do that, but I do think to get a sense of the stability of the system, watching the price of gold is not too bad.”
The overall discussion begged the obvious questions on monetary policy. It is not clear to me whether Greenspan’s characterization of existing inflationary pressures compels any changes, especially given these underlying forces are out of the Fed’s control.
Disclosure: author is long TIP and TBT
The price of gold, which has nearly doubled in the past two years, hit another all-time high yesterday.
Gold is at a 5-week high; silver and platinum are approaching 52-week highs. Charts for exchange-traded funds GLD, SLV, and PTM are below. (Click to enlarge.)
Mark Congloff at the Wall Street Journal says that until unemployment starts to drop, inflation “remains a distant threat.”
If that’s the case, then why has gold performed so well the past year? Why have long treasury bonds performed so poorly?
Fed officials continue to tell us that inflation is contained, yet the price of gold continues to soar. Here’s the daily chart for streetTRACKS Gold Trust exchange-traded fund (ticker symbol GLD):
Note that GLD has risen in seven out of the last seven trading days.
Unless you’ve been living in a cave, you’ve already heard this news. But I figure the record high gold price — nearly $1,100 per ounce — deserves its own post.
At the Wall Street Journal’s MarketBeat blog, Joanna Slater posits “a prizefight underway in markets, with two heavyweights slugging it out for bragging rights and big winnings.” The contenders: gold and treasuries:
In the yellow trunks: gold, which surged to yet another record price today, hitting over $1,100 per ounce before retreating. For the legions of gold fans, the Federal Reserve’s unprecedented efforts to pump money into the economy will end badly, igniting inflation.
In the red, white [and] blue trunks: Treasurys. Yields on longer-dated government bonds remain relatively subdued, a sign that investors aren’t overly worried about a massive upsurge in prices. Today, investors bought Treasurys, sending yields lower, as they digested a poor unemployment figure that underlined the fragility of the economy. The yield on the 10-year Treasury bond was recently trading at around 3.50%, below its recent peak of 3.95% in June.
Though long treasury bonds are above their June lows, they have greatly underperformed gold since the beginning of the year. The iShares Barclays 20+ Year Treasury Bond ETF (ticker: TLT) is down 21.8 percent year to date, whereas SPDR Gold Trust ETF (ticker: GLD) is up 24.2 percent year to date.
Even shorter-term treasuries have underperformed. The iShares Barclays 7-10 Yr Treasury Bond ETF (ticker: IEF) is down 7.8 percent year to date. The iShares Barclays 3-7 Yr Treasury Bond ETF (ticker: IEI) is down 3.2 percent year to date.
If this were a boxing match, gold would be declared the winner by TKO.