Hey all,
I’m kind of new to Austrian Economics, and was wondering if any one had any good resources to help me make heads or tail of how QE2 will effect the price of precious metals in the months/years to come. Anyhelp would be greatly appreciated.
Cheers,
Andy
I thnk the original quantitative easing had a dramatic effect in large part because much of the new money injected as excess reserves was loaned to commodity investors. This new quantitative easing effort may have an effect, but only because there may be a percentage of people who erroneously believe it will have the same effect as the last one. Therefore, there may be a marginal increase in demand, but I don’t think QEII itself will raise the price of gold dramatically. Most of the new money is going to government expenditure, if I’m not mistaken (actually, it monetizes existing debt, which means that the government may take this as an opportunity to create new debt).
Thanks Jonathan!
That’s an interesting point. I would also imagine that there might be worries over the devaluation of the dollar, and to a paranoid investor, moving to gold or silver would seem like a safer bet than sticking with soft money, especially with the effects of QE1 still fresh in the mind. I can see how the effect may not impact the price as much this time around, but it definitely warrants some close watching. Thanks for the input.
Cheers.
Correct me if Im wrong, but QEn, no matter what number n is, just means printing more money. What does it matter who gets the money? When the supply of money increases, it becomes worth less. Thus the price of everything goes up.
So that of course gold and silver will go up, along with everything else.
In addition, the demand for gold and silver will go up, as more and more people start figuring out what is happening. “That paper money won’t be worth anything soon. Better turn it into something real.” For the last few thousand years. “something real” has meant gold and silver.
So yeah, expect prices of both to go up up and away.
Smiling Dave,
Correct me if Im wrong, but QEn, no matter what number n is, just means printing more money. What does it matter who gets the money? When the supply of money increases, it becomes worth less. Thus the price of everything goes up.
As we well know, price does not increase simultaneously, instantaneously, nor equally amongst all economic goods. It rises first where it’s bid towards. The money originally created during QE1 failed to create a notable increase in the general price level largely because most of the money was never put into circulation (it was retained as excess reserves; thus the term “liquidity trap”). Some money given to investment banks went towards the commodities market, which explains the rally there, but there was no simultaneous or proportional rise in the price of any other goods (in fact, the price of most goods has fallen over the past two years).
As per the increase in demand for specie as a result of the devaluation of the dollar, I don’t think that’s the case. The dollar has not really dramatically devaluated in the past two years. In fact, relative to other goods, the dollar has mostly appreciated (except relative to commodities, food, and things like that, where there has been quite a bit of depreciation). I do think that investors in gold do so to guarantee the “value” of their savings, to some degree, but I mean there’s no panic; but much of the investment was done with the new money.
You have to understand that the market was already expecting QE2 before it was ever announced, and as such, it has already incorporated this into market prices (maybe not entirely). This doesn’t mean that precious metals are overvalued or that they wont continue to appreciate in the future. But it may mean, at least in the short run, a slight correction (short-term depreciation). When you invest you must include the expectations and general sentiments of the market. The price of precious metals have been appreciating at historically or near historically unprecedented rates, and many so-called financial experts simply don’t understand why gold and silver are even valued at all (beyond the industrial demand for such goods). This is why many claim that there is a bubble in the market for precious metals. Now, whether they’re wrong or right is entirely immaterial in the short-run.
Essentially, people who are just now getting into precious metals should be careful. The market is very complex and even those that are right may lose a lot of money. Additionally, If QE continues, and if the price of precious metals continue to rise at extremely rapid rates, then we may actually see a real bubble in precious metals, as the bears disappear (they may not understand why the price of precious metals continue to appreciate at such a rapid rate but may jump on the bandwagon nonetheless).
If you don’t actually want to buy gold directly there are a number of other ways to go about getting exposure to. For example a commodity currency such as the Australian dollar tends to have a high correlation with gold prices, and with the added advantage of positive carry. You could also go the route of buying gold mining stocks. It may be worth thinking about silver over gold as I understand there are lawsuits pending against JPM and HSBC which may force them to cover large short positions.
With trading nothing is certain, you are only ever playing percentages and likelihoods. In my view the likelihood is that gold will be higher in 6 months than it is now, but you can expect some fireworks inbetween to force ‘weak hands’ out.
Austrian Economics won’t help you much in the commodities market. AE is based on logic the market is based on fear and greed and can remain illogical longer than you can remain solvent. That being said, I think your best bet right now is on silver.Silver’s historical ratio to gold is 20.1 right now it trades at about 58.1. It has the dual function of being an industrial metal and a precious metal. If the economy does well demand for silver will rise due to the industrial uses. If the economy tanks and dollar debasement continues then demand will rise for precious metals. I think both metals are due for a short term correction…you may want to wait for a better entry point
I beg to differ.
That’s like saying strategy and tactics [=logic] won’t help you much in warfare, because warfare is based on fear and greed.
AE is a logical analysis of fear and greed. Of course, more is needed to succeed in the commodities market, [just as more than a knowledge of basic strategy and tactics is needed in warfare] though what exactly I am not sure.
I’m not suggesting that you put logic aside. Logic is your most valuable tool. Logic is never wrong in hindsight. The market moves on logic and crowd behavior. The collective IQ of a crowd is somewhat lower than the smartest cow in the herd. Any time you make a trade put in a stop loss. If your logic is flawed or the herd stampedes, you’ll still have some cash left for your next logical choice. To be a winner you only have to be right more than half the time.
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