Gold's loss of luster in 2013 solidified Tuesday as the precious metal settled 28 percent lower for the year at $1,202.30 an ounce, its worst annual fall since 1981
There's a significant difference between policies in 1981 and now. In 1981, there was a tightening in monetary policy that quenched inflation. With receding inflationary threats, gold retreated from its highs back then. The opposite situation prevails now, with interest rates and monetary stimulus fighting off the threat of deflation.
There was no bubble during the inflationary years of the seventies. But there is a bubble now. In order to fight deflation, the Fed is creating asset bubbles. These assets appear to be more appealing now that equities are booming. Hence, the loss of interest in gold. But is the boom for real, or is it all just a bubble?
A bubble, I say. So far, the policy makers can claim that there's no inflation. But there's plenty of asset inflation. This is misinterpreted as prosperity. What happens when that inflationary monster does appear? It must for it always does. In this instance, the asset inflation may ignite inflation in the real economy.
The only way that the inflationary monster doesn't appear is if the deflationary monster cannot be tamed. In that case, the monetary stimulus will become permanent. The evidence shows that this may not be the case.
Thus, the Fed is on a horn of a dilemma. It cannot give up monetary stimulus until the economy responds. But when (or if) it responds, it will then have to hit the brakes--- for once the economy starts growing in earnest, inflationary pressures will mount. Given all the monetary stimulus that will have preceded it, how can they be sure that the inflationary pressures won't be significant? If they are significant, and I think they cannot fail to be, gold will once again regain its luster.
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