GATA's Sheer Ignorance About Gold

By: Avi_Gilburt

GATA's Sheer Ignorance About Gold

As I have said before, my job on FATrader.com is to further intellectual honesty about financial markets but cutting through much of the dross being presented by most analysts and media outlets.

So, as I am known to do, I will peruse the various posting through the interest for something interesting and then write about it. And, while I cannot say what GATA writes is “interesting,” I can say it is always provides fodder for presenting why so many do not understand the gold market.

In its latest missive, GATA takes umbrage with Mark Hulbert’s latest article on gold To that end, they write:

“Hulbert notes that gold often fails to correlate with inflation, though it is widely supposed to. Indeed, gold's underperformance of inflation in recent decades has been a major disparagement of the monetary metal.

But Hulbert fails to inquire into this anomaly, though possible explanations are obvious.

After all, even some mainstrem financial analysts now acknowledge that government's official inflation metrics are constantly revised and rigged to underreport inflation. Does anyone who buys his own groceries or pays medical insurance premiums or taxes still believe that, as officials long have been proclaiming, there is no inflation?

And what about surreptitious intervention by government in the gold market? Hulbert hasn't denied it but then he hasn't ever mentioned it. Documentation and admissions of it abound -- but Hulbert never gets past the supposed sentiment of retail investors as the primary determinant of the gold price.”

I am not even sure where to start with this. So, let’s go in order.

There are two camps out there. Those that believe that gold will rally during inflation and those that believe that gold will rally because of deflation (as a safe haven). But, history has shown that gold will rally and decline during periods of both inflation and deflation. Yet, both sides will only point to the periods of time which support their thesis, while ignoring all others. This is the intellectual dishonesty within the gold market which we must recognize and take to task, or at least simply ignore.

So, GATA’s claim that we need to find an explanation as to why gold is not rallying during a period of inflation is simply ignoring history and shows their true lack of understanding of the gold market.

Next, GATA cites groceries, medical insurance and taxes as their support for inflation. Well, it is quite clear that GATA has never taken Economics 101.

I have written about this in the past, so I am going to repost what I have written, and let’s see if we can simplify this to the level that even GATA can understand:

DEFINITION OF INFLATION

As defined by Webster’s Dictionary:

Inflation is a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money caused by an increase in available currency and credit beyond the proportion of available goods and services.

Written in a calculation format, we would present it as follows:

INFLATION = MONEY/DEBT INCREASE ….. Yields ---> ….. GOODS & SERVICES PRICE INCREASE

In its simplest form, inflation is CAUSED by CREDIT/MONEYBASE EXPANSION. If you think about it, if everyone has more ability to buy goods because there is more money/credit available for them to do so, then the cost of the limited number of goods available must go up based upon the law of supply and demand. Of course, the opposite is true as well.

PERVASIVE MISCONCEPTIONS OF INFLATION

How is a determination of “inflation” actually arrived at by many of our experts today? We hear many pointing to the CPI or the PPI rising and then claim that we have inflation. We hear many pointing to the rise in price of precious metals - and then claim we have inflation. We hear many more pointing to energy and food prices rising and claim that we have inflation.

Yet, these same “experts” have had to dismiss periods during which the CPI has risen during declining employment statistics, or the declining housing statistics, or declining consumer debt statistics. They say that those price declines are happening for “other” reasons.

But, is the fact that we see certain prices rising (even though others are declining) a reason to cry from the top of the financial peaks that “inflation is upon us!?” Let’s analyze the definition of inflation a little more closely and see if these cries for inflation are truly warranted.

A CLOSER LOOK AT THE DEFINITION OF INFLATION

Whenever we analyze definitions, such as the one for inflation, we have to understand that there are two aspects to the equation; one is the cause, and the other the effect.

INFLATION CAUSE: an increase in available currency and credit beyond the proportion of available goods and services

INFLATION EFFECT: a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money

Keep reminding yourself during this exercise that inflating prices is an EFFECT of the definitional cause, and not the determinative factor in making the case for inflation. In order to determine if this effect is actually pervasive in the market and can be termed “inflation,” we need to determine if the CAUSAL side of the equation actually exists. Ultimately, we need to see an increase in available currency or credit which is outpacing ALL available goods and services in the economy in a relative manner.

We have all heard the term that “a rising tide raises all ships.” This is exactly how inflation works. Again, if more people have more buying power through possessing additional greenback notes or additional credit, then the prices of ALL the limited available goods and services in the economy, as a whole, should be rising.

Yet, we have some asset prices which are soaring, while other prices have been declining. But how can some asset prices really be declining if there is true inflation, which is supposedly caused by more “money” available to buy those assets? Shouldn’t the additional purchasing power, if it truly exists, cause ALL asset prices to rise in a true inflationary bout?

It seems to me that most analysts are only looking at the effect side of the equation and ignoring the causal side of the equation. But simply identifying price appreciation in some assets is not how we appropriately define inflation. Have you heard any “expert” point to a rising relative monetary base as the cause of the rising prices they cite? If not, how can one reasonably claim a resulting effect of inflation?

So, when GATA looks at certain rising prices, and claims that we have inflation, well, maybe its time for remedial economics.

Lastly, GATA last claims that “Hulbert never gets past the supposed sentiment of retail investors as the primary determinant of the gold price.”

Well, when GATA finally recognizes what Mr. Hulbert clearly understands, then maybe they may get a clue of what really drives the gold market. You see, it is investor sentiment and only investor sentiment which has driven the gold price. But, I suppose they need to continually fire the flames of manipulation to get their “members” to pony up more donations to them instead of being honest about the true driver of this market.

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Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.

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