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THE GOLD VOLATILITY MODEL: Latest Updates
Ed Breen, July 12, 2010 (© 2010)
This current update shows that the deflationary trend is not leveling out and will continue its acceleration through the fall. While the GVM has been alone and out front in predicting a continuing deflation while others argued over inflation/deflation signals in money supply and gold. The model allowed us to make the prediction that the market consensus that expected inflation would be disappointed and that the consensus would begin to change in the summer of 2010. I believe that is what is happening now. Those who look only at money supply expansion and so predicted emergent inflation have been incorrect and reduced to explaining in denial that the inflation in certainly coming according to some uncertain lag...predicting like a broken clock. Those who look primarily at the spot gold price are frustrated also as the emergent inflation they predict simply has not shown up and in fact the index measures continue to show disinflation. The accuracy of the GVM to predict the correct trend appears to derive from its simple and proper balance of the discounted gold price volatility and the change in the 10 year treasury yield. Using the 10 year treasury yield as a metric for inflation expectation and gold volatility as a metric for monetary mistake has produced a more accurate model than the reliance on spot gold, traditional base money supply expansion or the whole host of Keynesian demand measures. The present trend predicted by the GVM does not support the notion of a v shaped recovery, but instead portends a continued recession that is likely to worsen unless there is a change in present and expected fiscal policy going forward.
To the extent that the gold price increase was driven by an expectation of inflation then that price driver will not be sustaining. It appears to me more likely that the rise in gold price has been materially driven by a loss of confidence in the global monetary system. This driver of gold price is not properly seen as a fear of inflation but is really a discounting the risk that some sovereign currency may not be sustainable in the face of continuing deflation. The discount implied in holding non interest bearing gold disappears when the most secure sovereign debt also carries a negligible yield.
EDWARD BREEN was a long-time friend and confidant of Jude Wanniski. He served as a director of Mr. Wanniski's consulting enterprise, Polyconomics, Inc. Mr. Breen is an attorney licensed to practice law in the state of New Jersey and he currently serves as an active director of a private manufacturing business. In his career, he has served as the President of a real estate development company, as the founder and director of a publicly listed regional bank and he has been involved in a number of entrepreneurial investment ventures. Mr. Breen can be reached by e-mail here.