Midsummer Is Here – Inflation, Gold and Bitcoins

Midsummer at exactly 6: 51 pm today as we mark the summer solstice and the longest day of the year.

The weather does the day credit with the warm breeze that is blowing in the sultry heat and the skies still bright at 7 pm.

I have never known so many friends to be away at the same time, halfway across the world in France, climbing the hills of Hunan, driving across Hokkaido and some at the World Cup, of course.

hunan 1

Some of us may know the condition called SAD (Seasonal Affective Disorder) which brings on the blues when the weather changes and I suspect the impending El Nino heatwaves to come in the weeks and months ahead will lead to a certain dulling of the mind, instigating a need for change.

Inflation is behind trend for the US (2.1% vs FED target 2%) and Eurozone (0.5% vs target 2%). Yet we are likely to see a spike going forward just based on commodity prices preparing for the El Nino of the century. As it is, the current higher oil prices are translating into crop prices (because commercial fertilisers use Natural Gas or Oil as an ingredient to supply the hydrogen to make ammonium nitrate).

Animals eat crops ( cows eat 40% of US corn production) and that should mean higher prices yet again, if we do not count the extra mouths to feed in the 139 million new babies born this year.

My theory for the lower CPI figures we have seen in the past years is mainly the proliferation of online shopping and lower online prices. The trouble about that is that prices cannot trend lower forever after the first shock down, and we will find a base at some point.

The necessity of  inflationary expectations is everything the monetary policy is about. India and Indonesia are wrestling to tame inflation but the US, Europe and Japan are trying to get some back.

Europe has the hardest job of doing so because of their numerous price control measures particularly in the utilities sector and nationalised services. Japan is next because they have been stuck in a secular deflationary rut for over a decade.

Yet if they all want inflation, they will get inflation and stop at nothing till it is achieved even as the world shall become one big retirement home in the next 20 years. Japan has demonstrated that inflation is achieved quickest through a sales tax hike and massive currency devaluation.

If you agree with me on that point, we are both a bit late because the markets have run slightly ahead, as evidenced in the price of Gold (+3%) and Silver(+6%) this week.

Gold is a two faced asset – inflation hedge or safe haven hedge,  a store of value without much industrial use, usually disdained by intellectuals as an archaic store of value and even Warren Buffet will have nothing to do with it.

Personally, I do not know what is Gold anymore because the central banks have done such a good job in killing off the gold market after 1971 and the end of Bretton Woods, not to mention the bad press about market rigging of gold which no particular authority is particularly keen to pursue. I cannot even sell my gold bars at the bank counter unless I can produce the receipts and the gold must be packaged tamper-proof from point of purchase.

Physical gold is only good for citizens of countries like India, Venezuela and such, preserving their savings against their unstable currencies. In the developed world, folks now turn to the Bitcoin and her relatives, of finite quantity each but no limits to the creation of new Bitcoin variants, and even less limits on the online security of the assets as hacking thefts continue rise.

Gold, Bitcoin, Namecoin, Litecoin and whatever, are the enemies of the monetary system because they fall outside of it as substitutes to the legal tender that central bank controls. Incidentally, the Bitcoin has demonstrated a negative correlation with Gold prices whilst, quite surprisingly, having a strong positive correlation with USD strength.


Thus is the current Gold trend sustainable ? Or it is just a manifestation of the geopolitical uncertainties which has nothing to do with the FOMC’s and ECB’s crusade to bring back inflation ?

Given there is no motivation to buy Gold at the moment except as a hedge against rising inflation and against geopolitical risks threatening oil prices, it would appear that portfolios are just getting tired of stocks and bonds.

World Stocks Market Cap US 63 trillion
World Debt Markets US 120 Trillion
World Physical Gold US 1 Trillion

I am guessing the Bitcoin market is about US 10 billion. https://tradehaven.net/market/fx/a-place-for-bitcoins-in-my-life/

In the new world order, I cannot see Gold as an asset class more than FX anymore. The new investment paradigm has little interest in Gold and more in Bitcoin.

I have my little stash of gold coins for my Armageddon escape kit (practically harder to saw a kilo bar into pieces than to use 1 oz and 1/2 oz coins) but that is about it.

As an FX trade, Gold is looking good, having broken out of its dull routine. The strength in Thursday’s move could carry the trend higher in the near term for small and quick profits. Thus I would be looking to buy some under 1300 to target 1350.

In the long run, the 1 trillion dollar Gold market is really too small at current prices, and the same can be said for Bitcoins. Norges Bank with their 900 bio could easily buy up nearly all the gold around.

Then again, guess how big were the Fed’s balance sheets in 2007 ?

Now, that is what I call inflation.


Happy Midsummer.

Another holiday photo montage to share… this one from France.