The strange behavior of the gold market over the past several weeks begs a much broader context in which to understand it. Global economics is a system of interdependent structures and failing to take that into account could well be our downfall.
When Bernanke said that the Fed remained “prepared to take action” to protect the economy, we should have seen gold go down and equities go up. Gold fell, but so did the Dow. Despite promising progress in the afternoon session, the Dow dropped nearly all of the previous day’s gains while both NASDAQ and the S & P finished out the day in the red.
The international stock indexes were also a sea of red, with one very bizarre exception: Europe. While it’s true that Spain had a surprisingly good day at the auction, that every index except Estonia and Portugal should advance while China pulled out of the market is baffling.
Chairman Lou Jiwei of China Investment Corp., China’s mega sovereign wealth fund, said, “There is a risk that the euro zone may fall apart and that risk is rising.” His pronouncement reflects “growing dismay in Beijing at how European leaders are handling the escalating crisis in China’s largest export market, and anxiety over the potential for global contagion,” says the Wall Street Journal.
China has a different sort of problem to deal with. Their business model is based on the presumption that their prime markets would not self-destruct. The Chinese have an enormous competitive advantage, however. They see what is happening and accept it as it is, and they are taking action to protect themselves from the threat.
China knows better than to bet on a losing hand. It is clear that they are on a learning curve, but they have a distinct advantage in that they are learning from our example while we are not. They have another advantage as well – millennia over which to have built their identity. The United States is but an infant in comparison, and Europe is but an adolescent.
Because our vision falls so far short of China’s we waste our energy on fruitless efforts to revive something that we once had. China sees beyond the endgame we are in, and is now stockpiling gold.
In 1932 Garet Garrett wrote in “A Bubble That Broke The World” that the “modern function of gold [is] to limit the amount of money and credit that may be willfully, irresponsibly created and set free.”
China accepts that truism and so should we. As the gold market continues to struggle against its artificial opponents, the real foe is marching to victory.