Gold costs $400 an ounce to produce, so that its price of $1400 an ounce must drop sharply soon.
Oil costs at most $60 a barrel to produce, so that its price of $90 a barrel will drop sharply soon.
Stocks have a fancy P/E of 22.7, way above the typical 16. So they too will drop.
The price of housing is now “in line” with the cost of renting it. Thus houses will not drop in price.
Prices of stocks, bonds and commodities are way higher than their average over the years, so they will drop.
I’ve heard the exact opposite of every single one of those predictions, the main reasoning being that inflation will drive them all up. [Except for houses, which are way above their trend line of rising 3.5% a year. So they will drop about 30% in real terms]. But I have not heard the reasoning in this article discussed.
It’s a very good contrarian thinking article - as all asset prices have been bid up recently based on future inflation expectations - which are quite substantial.
Asset prices are in a bubble again - it’s just a question of how high the bubble will rise before popping.
The scary part of being contrarian is that to go against the flow means to basically be in cash (dollars.) Which is terrifying longterm prospect. Short term it will probably work out ok as contrarian usually wind up being proven right. Reason being : When the consensus all expects one thing (higher asset prices due to inflation) then the consensus has already all positioned themselves for that outcome. Which leaves very few left to actually continue the consensus move higher (or lower.)
As far as gold - I personally expect it to sell down to 1000 before ultimately moving way higher. Akin to the 1970s when gold had rallied from 35 to 200, then fell to 100 in 1976 (50% drop) only to surge to 800 in the next 3 years. Everyone is bullish on gold right now - too bullish. Not many new buyers available in the short term - unless the dollar collapses (which won’t happen yet.)
Henry Ford found this point out in the 191x when he kept reducing the price of the Model T and the factory kept making it cheaper thus keeping the profit margins about the same. That point is:
Prices and costs ARE NOT DIRECTLY RELATED. Prices may be above the cost of doing something or below or exactly equal. The only thing we do know is that firms whose costs are less than the price will make economic profits in the short run and that firms whose costs are greater than the price will have economic losses.
We do not have free market competition in gold, the way we (relatively) do in, say, computers.
We have a single, government-mandated commodity market, that is driven almost entirely by speculation.
As long as there is fear for the economy, gold will remain in its bubble. The moment the economy begins to really recover, gold’s bubble will burst. This is what has happened every single time gold’s price has risen, in the entire period since it was restored to the marketplace in the early seventies.
The bubble has simply lasted longer, this time, because the entire last ten years has been a Lost Decade, the weakest economically since the 1930s.
Gold, by the way, costs nothing like $400/ounce to produce. Note that the apparent cost to produce rises when prices are inflated, as there is overinvestment that drives overproduction. When the price falls down to its non-depression levels, probably $300/ounce, production will fall until the costs approximate what they were a decade ago.
Same caveats. Oil’s price has been driven almost purely by speculation and fear, for the past decade. Unlike gold, there’s no reason to see that clearing up any time soon. You describe a free market in oil, because free markets drive the production cost and price of existing goods to a marginal profit. But this is nothing like a free market.
Completely different objection: If you could determine what price something “should” be at with simple metrics, then central planning would work, and we wouldn’t need capitalism.
The whole point of an actual free market is that there is natural speculation, unlike a government-mandated commodities/futures market, and that the speculators are able to guess, overall, better than any “experts” and their nearly-meaningless metrics.
Again, only in a free market. Government’s interference could drive housing prices even lower, perhaps taking rental prices with them.
Maybe we’ll have real inflation, but not before we’re out of our current depression, which is driven by deflationary pressures. The only way we’ll see inflation is if the Fed fails to recognize a recovery and destroy the temporary money it’s created, PLUS ends its insane new policy of paying banks interest for excess reserves.
Basic law/fact of economics, accepted by all of the real Austrians:
On any existing, widely available good, competition will drive price downward, and quality/production upward, until the profit on that good is marginal.
This is the OPPOSITE of a Labor Theory of Value claim.
Yes, but only if the pricing he’s talking about had some semblance of a free market.
But the commodities/futures market is a monopoly, mandated by the government, designed specifically to amplify speculation (which, unamplified, is important and healthy in pricing) to the point where the cost/price ratio is nearly meaningless.
While the excuse is that a gambling marketplace is a great predictor of future needs, perhaps the real motivation was EXACTLY that the cost/price marginalization is destroyed. Farmers would hate it if the price of their crops tended to produce only a marginal profit, because of competition. Same with oil companies, gold mines, lumber mills, et cetera.
Are you talking about the CFTC? How does a regulatory body equate to a government-mandated monopolized (by whom?) commodities/futures market? Please provide reasoning and/or evidence to support this claim.
I mean that there is a unified commodities/futures trading market, designed (and regulated) by government, that was set up during the FDR administration as a replacement for both dozens of competing, smaller futures and/or commodities markets, and various alternatives that existed back then.
Think of it as if the government had, in the early days of ATMs, replaced all of the various, competing ATM networks with a single network, set up to their specifications. The claim would be that this would facilitate everyone’s transactions being universally available, but it would be worse than what actually evolved, which is nearly universal intercommunication, but still competing systems.