Monday, August 3, 2015

August 2016 Market Commentary

More than 200 years ago Adam Smith opined that,
“Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands… those unproductive hands… may consume so great a share of the whole revenue, and thereby oblige so great a number to encroach upon their capitals, upon the funds destined for the maintenance of productive labour, that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.”

Much later F. A. Hayek, explained the consequences of over-consumption by the private and public sector: “The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock.”

I believe that misguided fiscal and monetary policies around the world will lead again to a global recession.

My readers will naturally wonder what my views are about gold following the latest sell-off. What is obvious is that gold is now an unloved asset, which is badly oversold in the near-term, and which should shortly benefit from seasonal strength.

However, we also need to entertain the idea that the recent sell-off is a clear break down move, which may lead to further weakness – possibly to $800 per ounce (this is not a forecast). One point I should like to make about a further significant price decline: such an event could be a signal of overwhelming deflationary forces in the system, which would lead to a collapse of other assets including equities as well. This is a point the super gold bears and the stock bulls should consider.