Tuesday, May 27, 2014

Good call on gold | Inflation call surprise at Sintra conference

No sooner had we sent out yesterday’s commentary, expressing the view that gold was heading for a fall, than the precious metal started to go south in a big way. Amplifying the relief in the market from what appears to be an amelioration of the situation in Ukraine were a number of positive reports from the US. Both Durable Goods orders and Consumer Confidence came in better than expected. These fit nicely into the scenario that will see QE terminated in the US on schedule, and a rise in interest rates there sometime after that. All bad for the price of gold.

So where to from here? The trajectory for the gold price is resolutely down. As always, it will not proceed in a straight line. In addition to that, there is a very strong support level in the $1180 per Troy Oz area that will have to be given serious attention when and if it is reached (see chart above). If this is broken in any kind of resolute manner, then it is anyone’s guess where the price of gold will come to rest.

Inflation call surprise at Sintra conference

The European Central Bank (ECB) has just concluded a two day conference for its members, leaders of associated agencies, academics and influential commentators at Sintra, which lies west of Lisbon in Portugal.

One of the more interesting speakers there was Paul Krugman, Princeton University economist, whose column in the New York Times is syndicated worldwide. It is obvious from what appears in the Irish Times under his name that he is a dedicated supporter of government measures to assist the economy in all spheres and a proponent of state assistance for healthcare, social protection and unemployment relief payments – in other words he writes with a regard for the needs of the great masses of citizens everywhere.

Krugman made a speech at the Sintra conference on inflation. It might be expected, given his standpoint as outlined above, that he would be arguing for less of this, or at least that the current low levels are not the disaster they are painted in some quarters to be. Inflation always hurts the general public as it curtails spending power, reduces the value of savings, leads to anxiety for the future and promotes industrial unrest when workers attempt to maintain living standards. But Krugman is not concerned about this. He is calling for a greater inflation target that that currently aimed for by the ECB, of close to 2%.

The attitude of Mario Draghi was interesting. He is quoted as saying in response to the professor’s speech:

“…try telling that to Germany. What would it mean for a German, for example, to have a 5% objective in the whole of the euro area? I don't even want to think [about] that”.

Somewhat appropriately, given Prof. Krugman’s day job, the whole question is academic. The ECB is simply not able to dictate terms for inflation and is under severe pressure to achieve even its 2% target, never mind an increase beyond that.

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