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February 02, 2011 – Comments (5)
So when inflation kicks in, interest rates have to rise. But gold goes down when interest rates go up. But gold goes up when inflation kicks in....what am I misunderstanding? And how will China raising rates affect gold this week?
I've believed for a while that gold's rise has more to do with East Asian currency pegs that artificially weaken consumers' purchasing power in those nations than anything else. As that whole scheme collapses with high inflation, it's actually a rather bearish scenario for gold. That's the one thing that gold bugs here don't understand.
That said, the issues with the Euro could potentially allow gold to have yet another run; which is why I ended my gold miner shorts with 10% - 15% gains.
Gold seems more like a fear hedge than an inflation hedge in my opinion. That being said, I think golds rise has to do strictly with what gold lovers want it to do with. If people are willing to buy more gold as inflation ramps up, that will drive gold up, so it could work that way.
Do you think that if China simulataneously unpegs their currency while the Euro problems rise, that the fear factor will outweight the unpegging factor?
China is raising rates to try and fight inflation. They won't succeed if they are pegged to the dollar.
If China unpegged (they won't) everybody else would be buying gold, because inflation would be harder to export.
So if you think they wont unpeg the dollar, but you think unpegging the dollar is good for gold, then isn't it bad for gold that they won't unpeg? So theres no bull case for gold regarding China?
China will eventually have to unpeg, but in the mean time, they have to buy a bunch more commodities including gold.
To control unrest, they had to choose a path of fast growth and they realize that they have to pay a price for that growth eventually.
When they unpeg, they understand the global inflation that it will create. They have been buying commodities for years and are now encouraging their population to do the same.
They are doing their best to prepare for local deflation by taking advantage of the global inflation that it will create. They can't tolerate the local deflation yet. When you get Chinese citizens telling you how good things are in China, it might be the right time to bail out.
The real estate bubble might force their hand sooner than they want, but if it doesn't, they continue to keep buying commodities (keeping the demand up) until they deflate their own currency and inflate everyone else's.
Their plan right now is that inflation is not that bad as long as countries with lower productivity have inflation that is worse. When they bail out, they will have less pain than countries exporting inflation, but they have to be carefull not to pull the trigger until enough of the population feels comfortable enough not to revolt in a deflationary period. They aren't close to that yet, so like the US, they'll kick the can down the road for a while. A real estate bubble popping will force their hand quicker, but their deflation increases inflation among the developed countries.
China actually has the right plan to defeat the US, but I think that they won't be able to continue the results long enough to accomplish their goals. They need a couple of more decades. They don't have them. The western world was too willing to exploit their forced willingness to produce more to gain less. Their plan worked too well. Even in the totally planned economy that they have, they still can't plan for the unexpected.
When 5% growth in the economy is unacceptable, they don't have a margin for error either.
China will implode, but I have no clue when it will happen. When they implode, inflation in the rest of the world gets worse and not better.
Your question should be, "When will China stop the rise in inflation in the rest of the world?" The answer is that they can't now even if they wanted to, and they don't want to.
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