01 Jul 2010

Cash Is Queen, Gold Is King

Financial Economics 2 Comments

Over at my #1 financial blog, Robert Wenzel has a post, “The Story of the Second Quarter: Cash (the Dollar) Is King.”

Wenzel shows how the US stock indices are all way down for the 2nd quarter, and that the US dollar index is up 6.19%. Then he says:

To my gold bug friends, unless Bernanke starts printing extremely aggressively, a severe dip in the gold price may be just ahead. Long term holders shouldn’t panic out of their positions. Short term traders should be on the sidelines. The one variable that could negate the short term dip is buying by central banks. Panic buying by individuals will be finite in nature without central bank money printing. Whipsaw action could be the ultimate outcome.

Don’t get me wrong, I’m not saying that gold will march onwards and upwards with the regularity of an atomic clock, but there are two things Wenzel doesn’t tell his readers:

* In the second quarter of this year, according to my eyeballing of the graphs at Kitco (so I might be a bit off), gold was up 10.8%. So cash is queen.

* When Wenzel says that Bernanke isn’t printing dollars, he has in mind the monetary aggregate M2. (If you look at the actual dollars that Bernanke creates by writing checks on himself, then he most certainly has been creating dollars like crazy, without slowing down, since September 2008.) That’s defensible, but it’s worth pointing out that M2 has been fairly flat (only rising less than 2% since 12 months ago) since March 2009. Yet from March 2009 to now, gold has risen (again just eyeballing it) about 33%.

Don’t get me wrong, if Wenzel is right, and ultimately the gold price is constrained by M2 (regardless of what Bernanke does with M0, or what is called the monetary base), then this last point is all the more reason to suspect gold is in a bubble.

BUT, it also makes you wonder if Wenzel is wrong to narrowly focus on M2, and to keep warning his readers that gold is going to correct any day now (as he has been doing for months).

Last point: Yes, I have thus far been crying wolf about price inflation. I am simply pointing out what seems to be a large possible hole in Wenzel’s analysis.

2 Responses to “Cash Is Queen, Gold Is King”

  1. Michael Dunton says:

    Gold will have it’s moments and so will cash. Gold is due for some pullback, but the overall trend is still up. How long a pullback will last and for how much remains to be seen, but I can see gold retreating 5-10% more over the course of the next several months before continuing upward.

  2. Billy says:

    A question regarding your last point. Wouldn’t we (or shouldn’t we) see rampant price inflation if those hundreds of billions were lent out by the banks rather than sitting as reserves at the Fed, held by said banks? I know there’s some bundles of cash flowing to the private sector as part of the “stimulus” but I haven’t been paying attention to how much, so I’m not sure what’s really happening there.