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LAWRIE WILLIAMS: Gold, lies and statistics.

In discussing the latest outcome of the U.S. Fed’s FOMC deliberations, Martin Murenbeeld, writing in his latest Gold Monitor weekly newsletter, notes “Not to be overlooked from a gold perspective, the real FF (Federal Funds)-rate (the nominal rate of .25% less inflation) is expected to stay around -1.5- 1.6% through 2023. If this isn’t positive for gold, I don’t know what is”.  But even these figures have to be suspect – at least as far as the ‘real’ inflation rate is concerned -  in this day and age of massaged statistics.  They could well be worse (in other words even more positive for gold) were it not for ever-present attempts (mostly successful) to keep the yellow metal’s price rises suppressed.

I am a mining engineer, not a trained economist, so the opinions in this article are more from an engineer’s pragmatic standpoint rather than from a trained economist’s more theoretical assessment and that should thus be taken into account by the reader.  But then there is a place for pragmatism in one’s approach rather than being a slave to economic theory.

Gold is, or should be, the ultimate economic bellwether if it was given free rein, but governments, central banks and their allies in the financial sector seem to be doing their utmost to keep the metal’s price under control for fear of unleashing Pandora’s box and bring the whole global financial system to its knees.  A rising gold price is seen as a devaluation of the mighty dollar – the cornerstone of the global financial system for now - so gold price appreciation should go hand in hand with a declining dollar, or vice versa.  The latter is seeing a weakening almost by the day in view of the U.S.’s enormous debt position.  Go figure!

Paul Volcker, who died nearly two years ago was perhaps the most outspoken, and arguably the most successful U.S. Fed chairman – a position he held from 1979 – 1987 under both Democratic and Republican Administrations – in recent years.  He has been seen as the Fed chairman responsible for vanquishing runaway U.S. inflation and was an outspoken critic of gold’s role in global financial markets.  Indeed he is seen as the architect of President Nixon’s gold window closure when he was in the Treasury Department and before his stint as Fed chairman.  He set forth the mantra that the gold price should be controlled through central bank influence – a policy which looks logically to have continued to the current day, although vehemently denied by those who have the ability to implement such programmes.  But then who believes such denials?

Let’s take a look at statistics too.   "There are three kinds of lies: lies, damned lies, and statistics." -  a saying popularised in the U.S. by Mark Twain and others, but one which seems to ring true today.  Every time a government comes up with a change in statistical analysis, the new calculations invariably present a brighter economic picture than their predecessors.  This has been highlighted in the U.S. by John Williams’ Shadowstats service which is, according to Wikipedia, perhaps best known for its alternative inflation statistics. Williams says that major changes to the Consumer Price Index were made between 1997–1999 in an effort to reduce Social Security outlays, using controversial changes by Alan Greenspan that include "hedonic regression", or the increased quality of goods.  Shadowstats notes that U.S. inflation, among other government statistics, would be enormously higher (more than 2x so) if calculated under the old 1980 system – something that certainly rings true with the average U.S. consumer.

In his latest posting on the shadowstats website Williams notes the following and this was prior to the latest Fed statement:

• Four Million Unemployed People Are Missing from the Headline Labor Force
• Pandemic-Disrupted U.3 Unemployment Effectively Was 9.0% in November 2020, Not the Headlined 6.7%
• November Unemployment and Payrolls Confirmed Stalled, L-Shaped, Non-Recovering Economic Activity
• For the Second Straight Month, Payrolls Declined Year-to-Year by 6.0%
• Theoretically Equivalent Third-Quarter 2020 GDP (Product) and GDI (Income) Rebounded by Varying Annualized Quarterly Gains of 33.1% and 25.5%, Still Holding Far Shy of Economic Recovery
• Unprecedented in 40-Plus Years of Weekly Monetary Reporting: Money Supply M1 Jumped by 14.1% in the Last Two Weeks, in a Post-Election / COVID-19 Flight to Cash, From M2 to M1
• Year-to-Year Gain in Monthly November M1 Jumped to a Record 53.2% from the Prior Record of 42.3% in October, Surged to 65.6% in Week-Ended November 30th
• The U.S. Dollar Is at Its Lowest Level Against the Swiss Franc Since January 2015, Down by 10.0% Year-to-Year A Weak Dollar Is Highly Inflationary for the United States and Bullish for Gold
• Collapsed Oil Prices Still Suppressed November CPI and PPI Annual Inflation; Yet, Oil Prices Suddenly Are Surging Anew

He concludes by noting “Holding physical gold protects the purchasing power of dollar assets, irrespective of any near-term volatility in, or manipulation of, gold prices

The above is a salutary reminder that government statistics are not necessarily a true statement of the ongoing financial, inflation or employment situation as they have been calculated in the past.  Governments are in the business of keeping the general population as happy as it could be, and if this involves massaging announced statistics in their favour then so be it!

There are almost certainly continuing moves by governments and central banks to keep gold price rises under control in order to protect their fiat currencies from total collapse in the light of a stratospheric increase in the gold price.  However a steady currency value erosion and a controlled gold price increase may well be on the cards.  Certainly continuing interest rate suppression policies by the major central banks, leading to negative ‘real’ interest rates suggest that this is probably the case.  This does not mean that price suppression by central bank allies in the major futures markets will cease, but it will possibly continue at perhaps a less extreme level than in the past and allow a slow, and relatively steady gold price increase and corresponding ‘stealth’ currency devaluation. If some increase was not allowed then the dam could eventually burst under pent-up pressure and gold might rise out of control bringing the whole financial system crashing down.  Volcker once described gold as ‘the enemy’ and provided one keeps one’s enemy close, and thus under control, matters are unlikely to deteriorate too far.

Thus for as long as this status quo continues gold should beat a slow and steady upwards path as predicted by conservative gold bulls like Martin Murenbeeld and CPM’s Jeffrey Christian and a number of bank gold analysts.  If the ultra bulls predicting a $10,000 gold price in the next year or so are correct then probably the overall global impact will be disastrous so we hope and pray this will not come about.  Be careful what you wish for!

20 Dec 2020 | Categories: Gold

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