Gold bugs vs voices of sanity, cont’d

Bitcoins, gold and silver crash, and Forbes asks ‘what next?’

According to the conspiracy theories floating around, the rapid drop in the value of gold happened because the US government, big banks and funds chose this time to organize a massive short. Why? The Federal Reserve wants people to hold US dollars in order to save the pitiful currency. (‘A high-frequency trading bomb in certain NYMEX/COMEX markets on Friday, following days of spin and misinformation’ say these guys.) Therefore, this is a good time to buy the yellow metal before it goes back up to its true level.

People who believe this have a huge hang-up about quantitative easing and the unrestrained printing of ‘fiat’ currency by governments with no hope but to inflate away their countries’ vast debts. In the popular imagination, these gold bugs are holed up in the hills with stores of food and ammo, but many are normal-looking people wearing suits and walking on the streets around us as we speak. Either way, they know in their very marrow that when governments print money as they have been doing, you’re bound to end up needing baskets of cash to buy a single loaf of bread.

Less excitable and more moderate commentators see the tumble in gold as an overdue correction of a classic speculative bubble. Investors who believed bullion would hold its value as all else was debased (or investors anticipating such sentiment in the market) piled in over the last few years and drove the price up. But – Hong Kong milk powder and Spam notwithstanding – the much anticipated hyperinflation never came; indeed, the Federal Reserve may even be whispering about tightening monetary policy at some stage.

These moderates see themselves as realistic and essentially non-ideological. To paraphrase Keynes, when the monetary conditions change, I change my policy. When a credit crisis threatens debt deflation, you print however much money it takes to prevent being sucked into that vortex. As Milton Friedman vividly demonstrated on TV many years ago, inflation is easy to stop: you switch off the presses. Deflation, as various Southern European countries are now finding out, kills society.

The gold bugs snort that printing more money to cure the results of having printed too much money is illogical. If economics were a pure, cold science, they would probably be correct; but it’s partly about human behaviour and perceptions.

Maybe now we will find out who’s right. If it’s the mainstream moderates, the whole post-2007 panic is finally at its closing stages. Gold has crashed, and will stay crashed, for basic macroeconomic reasons. Leaving aside North Korean nukes, Spanish default, etc, we can get back to Forbes’s question. What will crash next?

Can we think of an asset class like gold that has, arguably, been inflated into a bubble by the idea that it is the only thing around that will hold its value during the hyperinflation that – it now seems – we won’t be getting? Here’s a clue: there would be a lot of spiky-haired real-estate agents looking for work…

Meanwhile, China is lapsing into mouth-frothing diplomacy again. The United States is threatening Asia-Pacific security by not ordering the Philippines, Malaysia and Vietnam to surrender half their territorial waters to the Middle Kingdom, it seems. We must console ourselves with the fact that this is purely for internal consumption, and the officials in Beijing don’t actually believe a word of it. Mustn’t we?

And to end on a cheerful note, the South China Morning Post today brings us not one, but two, hilariously great moments in Chinese censorship…