The great manipulation of financial markets seems to be reaching its limits; bubbles are at their highest, and so are risks. The central banks’ money printing machines, along with interest rates kept on the floor, are working perfectly well: The yields on sovereign bonds are at historical lows in the United States, Germany, the UK and France. They, in fact, are working too well: those bonds do not even match the inflation rate, an obvious sign of a bubble.
Then where is the money going, if sovereign bonds are under-performing? To the stock market, of course, which is establishing new records. The Dow Jones surpassed its 2007 record, just before the 2008 crisis started, and all around the world the Bourses are doing just fine. Another sector where money can find shelter: real estate. But the situation is more contrasted because, even if we observe tensions or bubbles here and there (China, emerging countries, certain areas in the United States and Europe), investors are not quite ready to take the plunge, just a few years after the subprime crisis.
So we observe that, with large asset classes, limits have been reached: Central banks cannot lower their prime rates, already at nearly zero, sovereign bonds cannot durably yield less than price inflation, and the stock market cannot make believe the economy is on the mend, better than it was in 2008, and finally, the real estate market is making a little progress and still constitutes an alternative, but players remain prudent.
The problem is that those high indicators are betting on the economy’s capacity to rebound and the States’ capacity of undoing their debt... which is absolutely not happening for the moment. To the contrary, public debt in the United States, Europe and Japan continues to climb, and growth is not making any comeback (1st quarter GDP was +1.6% in Japan, +0.2% in the Euro zone, and -2.9% in the United States...). There is a blatantly growing disconnection between the real economy and the financial markets, and this cannot last for a very long time. The tiny growth achieved is through the “wealth effect” (those who own assets feel richer and consume more), whereas only an improvement in productivity followed by a rise in income may give birth to durable growth. But, tough luck, corporate investment remains depressed.
During the last great period of growth, bought with credit (2000-2006), gold played its role of warning signal by clearly rising; by doing so, it was showing that credit was exceeding the economy’s capacity, that too much money was being created. This time, its price is more erratic... but it is under surveillance. After discreetly staying around $300 an ounce in the ‘80s and ‘90s, its rise, starting in 2000, put it in the spotlight. And, when it got too close to $2,000 an ounce in August, 2011, central banks and sovereign states didn’t appreciate their paper currencies being so utterly ridiculed. Since that time, as we know, the price is more or less manipulated to the downside but, according to Egon von Greyerz, the gold manipulators are desperate: “With empty coffers, central banks and bullion banks are getting desperate”. Hmm... wouldn’t this be the perfect moment to get away from stocks and bonds, for those who still own them, and to switch to gold, physical gold, that is?
Whatever may be, we might soon see the reversal occur. We will have to watch American growth, see if the Fed succeeds in ending its Quantitative Easing plan and starts to raise its rates, as Janet Yellen promised. The main world economic power will again, of course, set the tone.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.