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What goes Up…

Gold Price1990 - FRB StL(Analysis) As anyone with even a casual interest in the history of trade knows, from time to time markets are subject to a frenzy. Prices are bid up to some extreme level – based on a flimsy reason that market participants choose to accept (for a time), until reality comes crashing home and prices dramatically fall. This is repeated over and over again, and each time market participants and observers claim to be shocked. It is commonly known as a “bubble”.

Recent large declines in the price of gold, coming after a decade of continuous large run-up to its price (solid gold line in chart), has the potential to be the next burst bubble – the housing price run-up (solid black line in chart) prior to 2006 even looks mild by comparison. As one famous investor reportedly observed before the stock-market crash in 1929: when a shoeshine boy starts giving out stock advice, it’s time to get out of the market. Until very recently, almost everyone seemed to suggest that gold was a sound investment.

Many market pundits believe the price of gold to be rational because they regard it as a potential hedge against inflation. But as inflation remains subdued into the sixth year since the financial collapse of 2007-8, gold might be starting to lose its luster – as its recent price movement could indicate.

Because markets exhibit from time to time these irrational manias, workers have a vital interest in keeping the government system of social security strong, in order to secure a decent lifestyle at retirement. Market-based solutions for retirement are too easily subject to bursting bubbles and manipulation – the corruption exposed last year in setting a benchmark rate of interest should serve to stifle calls for privatization of the social-security system.1

1 “Benchmark Rates Should Be Anchored in Real Data, Iosco Says” by Jim Brunsden and Lindsay Fortado from Bloomberg. <http://www.bloomberg.com/news/2013-04-16/regulators-must-end-conflicts-in-benchmark-rates-iosco-says.html >

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