Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice
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World Gold Council data released earlier this month reveal a paradox. Demand hit 4,389 tons during 2016, but mines produced only 3,236 tons. Yet despite differing supply demand fundamentals, gold prices rose by only 9%. A supply squeeze that size, should have produced far bigger price action.
As with many of life’s mysteries, a good place to start is with Chinese thinkers. No, not Confucius, Lao Tse, or even Sun Tzu. I am talking about Bruce Lee.
In a competitive investing world, in which price discovery, financial reporting and economic data are systematically distorted, the best parallels are with competitive boxing, which is governed by the Marquis of Queensbury rules, and a street brawl.
“When you talk about fighting with no rules,” said the late martial artist, in the lost Bruce Lee interview, “you had better learn to use every part of your body. Your feet. Your elbows. Thumbs. Everything.”
That sage advice increasingly applies to an investing world, in which supply-demand fundamentals, as measured by official statistics, don’t tell you much.
To avoid being fleeced, gold investors - indeed all investors - need to know a bit about everything. Some examples:
Economics and central bank manipulation
Most seasoned investors have caught on that the US Federal Reserve has been intentionally manipulating housing, bond, equities and other asset prices higher. Ben Bernanke, a former Fed chair, and Richard Fisher, former president of the Dallas Fed, have admitted as much.
Less well-known, as Bill Gross recently pointed out, is that while Fed manipulations have tapered off, European and Japanese central banks continue to buy $150 billion a month in assets.
This has swelled global balance sheets to $12 trillion and distorted prices throughout the system. Ten-year bond rates would be nearly 3.5% (instead of 2.45%) Gross suggests, without the manipulations.
If interest rates were 43% (1.05 percentage points) higher, this would bring down the implied value of stocks (by more than 30%, according to this writer’s back of the envelope calculation).