Gold: Correction Due?

Bullion Vault

Gold: Due a short-term correction, but a long-run bull market…?

SO THIS is what happens when you don’t have a free market for money, writes Dan Denning in his Daily Reckoning Australia.

A committee of men and women whose interests may be more aligned with the banks than yours get to set the price of money and make a hash of everyone’s careful long-term planning.

How is it theoretically consistent, as my friend Gary North asks, to have central planning for money in a free market system?

Uncertainty…chaos…bad decision making. This is what makes individual planning so hard in a world with fiat money. The supply of money (and thus the value) is always changing. Economic decisions that made sense with interest rates at one level make a lot less sense with interest rates at a different level. Mis-calculations are made. Good investments go bad.

Will the Reserve Bank of Australia’s decision on Tuesday to raise interest rates for the first time in 19 months expose people who didn’t plan for it? Of course it will. The housing sector is where we’ll find out. And you can guess what we think of housing, can’t you?

We think the Federal government behaved shamefully by suckering first-home buyers in with free cash when interest rates were historically low. Now that rates have begun moving up, the most marginal buyers will begin feeling the pinch. And what will happen to house prices?

As far as stocks go, there might be an even bigger rates-related story playing out. The RBA becomes the first G-20 central bank to lift rates. Whether it’s stupid or prescient, no one knows. But we have to consider the possibility that it could ignite a reversal of the trend in global bond yields. Yields on government and corporate debt could be headed higher now.

Read more….