$4,000 gold and housing affordability

The price of gold recently hit $4,000 per ounce. That means a lot to economists. When the U.S. government created the Federal Reserve in 1913, gold was worth just $22 per ounce. What happened? 

Gold has had value for thousands of years. So, people have taken care of it and only insignificant amounts have been lost. Almost all the gold ever mined still exists in someone's vault. Mining companies continue to add to the stock, but in comparison to the amount existing, their contributions are small. Central banks hold most gold. 

Zombies threaten growth in 2017

Most economists expect the economy to grow at its most rapid rate next year. One of my favorite economists wrote this:

“If the new Trump administration cuts taxes and deregulates the economy, expect higher economic growth and another good year on Wall Street. However, I also expect higher interest rates and more inflation. 'King Dollar' should continue its rise, which will make it difficult for gold and other commodities. Avoid bonds and gold -- stay invested in the stock market.”

Let’s get the obvious problems with that forecast out of the way: higher interest rates and inflation are bad for the stock market and inflation is good for gold prices. And inflation means a lower dollar, not higher.

Goldman Sachs rains on Trump honeymoon

Traditionally, a new president enjoys a “honeymoon” period during his first few months in office but it seems that Goldman Sachs doesn’t like tradition. The investment bank tried to puncture the euphoria in the stock market over Donald Trump’s victory by issuing a sober forecast of what the US can expect from his regime next year. Their conclusion:

The prediction comes as part of the team’s annual not about the top ten market themes for 2017. Theme No. 1: Utter disappointment.

Actually, the theme was closer to “more of the same.” GS thinks stocks are pricey already and the economy won’t improve enough for profits to relieve some of the altitude in valuations. They are probably right and things might actually get worse if we get the long overdue recession.

The View from Vienna on Interest Rates and the Stock Market

Interest rates have some impact on the stock market because if investors can earn a better return in bonds than in the stock market and with less volatility they will sell stocks and invest in bonds. A large part of the recent record highs in the stock market reflect the Fed’s squashing of interest rates. The Fed wants to punish savers and reward debtors.

Interest rates have been falling since the early 1980’s to near zero today. According to the Financial Times columnist, Gavyn Davies, my main source for what central bankers are thinking, the International Monetary Fund identified three main reasons for the decline depending on the period:

1. In the 1980’s and 1990’s Fed inflationary policies caused the drop.
2. Since 2008, businesses have quit investing.
3. 2002 – 2007, the savings glut from emerging markets kept rates low.
4. Since 2000, portfolio shifted to bonds because of two stock market crashes.