This week, I looked at America priced in gold — and noted that America is experiencing gold-denominated deflation. This means that when assets are priced in gold they have consistently fallen in price. Lets re-cap. Here’s the Dow Jones Industrial Average:
Here’s retail gasoline:
Here’s the U.S. Dollar and a selection of other currencies:
Here’s two-year Treasury debt:
And here’s twenty-year Treasury debt:
From the perspective of central banks, and particularly through the lens of quantitative easing — which seeks to remove non-productive assets from the open market to encourage investment in more riskier ones — this phenomenon of gold-denominated deflation is another factor contributing to the global slowdown. If the gold price keeps going up, lots of investors are going to choose to park their liquidity in gold, and not riskier productive investments.
Bernanke has already heavily targeted yields on treasuries which have absorbed liquidity that has departed from productive ventures. But in recent years gold has offered a significantly increased return over treasuries.
So what’s a central banker who wants to force investors into productive ventures to do? You can’t print gold — but you can buy it, and take it out of the marketplace.
And as the price of gold (in fiat) continues to rise due to the ongoing global slowdown, and gold’s increasingly attractive yields, buying gold is exactly what central bankers may do.
Ultimately, the rise in gold prices is indicative of the global slowdown. It is proof that investors are shying away from productive assets.
Fiat-denominated prices tell us very little; fiat currency that can be pumped out at whim is merely a mask to hide the massive underlying asset deflation that we see when we price assets in gold.
Just as Roosevelt went out of his way to remove gold from the marketplace, the central bankers of today may eventually determine to do the same thing.