I see gold keeps powering ahead this week. Is the bid in it what we discussed in terms of China being the invisible hand in the market. Gold has run up to this level in the past and retreated, but this time I think we get follow through....all the fundamental and psychological reasons are in place. The Government is putting in huge inflationary policies.
The wildcard is that China is going to demand higher rates in exchange for buying our debt. The only way the US can handle this is to create inflation.
In some ways, we are playing China as a stooge. They are trapped in the dollar and we need to stay one step ahead of them. The dread scenario would be to have a deflationary environment but have to raise rates to placate the Chinese. The Fed won't let that happen.
If there is major inflation, the Fed won't mind paying China higher rates because they will want to have higher rates to fight inflation. So, the more China demands higher rates the more they are forcing the Fed to print money to create inflation so we can afford to pay them higher rates. As we print money and raise rates the value of US treasuries held by China plummets.
It is a paradox. China owns a trillion or so in treasuries, yet they are going to demand higher rates which will lower the price of their treasuries held? US policies have boxed us into a corner where the only solution, as the Fed, Summers and Geithner know, is to create a major period of inflation all the while saying publicly we are against it. What a wolrd, eh?
Everything is lining up for massive inflation in the next ten years. At some point gold runs to 1,800 or more...is this move up the beginning? It feels like it but time will tell.
Addendum: bloomberg just did a very instructive post on the issue with bonds
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