In a post last April, I introduced the thesis that gold's "second great rally" was over, and that gold prices would probably realign with commodity prices at a much lower price.
With gold down some $40 today, it's as good a time as any to revisit this issue. As I read the chart above, it continues to suggest that as a first approximation, gold prices are headed to $900-1000/oz.
When gold prices reached $1900/oz. two years ago, I think it was because the market was betting that all sorts of things would go wrong: the Fed's QE would create hyperinflation, the dollar was going to crash, and/or debt defaults in the Eurozone and possibly in the U.S. would lead to another financial Armageddon. Since then, it's been a case of the "dog that didn't bark." Nothing terrible has happened: inflation is quite low, the dollar has picked up somewhat, the Eurozone economy is once again growing, and debt default concerns have faded.
Today we've seen that yet another shutdown of the U.S. government has (so far) proved to be a nonevent. (See above chart: financial conditions have rarely been so tranquil as they are today.) No one seriously believes the U.S. will fail to pay its debts. Even though federal spending represents 20-21% of GDP, fully two-thirds of that spending comes in the form of transfer payments—taking money from one person and giving it to another, and that doesn't get shut down. Abstracting from transfer payments, which unfortunately lead to perverse incentives (those who pay are generally more productive than those who receive), the federal government only consumes about 7% of GDP. By its gargantuan size and nature, government is already a big drag on the economy, and a bit less government can't be such a bad thing.
The big news, however, is that the debate over the shutdown centers around the role of government. Should the federal government be pushing us all into a government-controlled healthcare system? Can government ever hope to efficiently manage the entire healthcare industry? Republicans are in a sense trying to save the Democrats from their own healthcare folly by conditioning a Continuing Resolution on a one-year postponement of Obamacare, a massive and intrusive program that is simply not ready for primetime, as I discussed last week. But since the Democrats are determined to ignore the huge flaws in their program, and since Obama refuses to negotiate, we're in a stalemate. As Ilya Somin points out, "there is considerable symmetry between the two sides’ positions."
There's not much symmetry, however, to be found between the government's rollout of Obamacare exchanges and Apple's rollout of iOS 7, contrary to Obama's assertion today. As Obamacare exchanges—over three years in the making and targeted to a mere 30-40 million U.S. residents—today opened for business, failures and shutdowns were widespread and predictable, preventing millions of users from signing up—and that is just the first of what are sure to be many more glitches and disasters. If Apple had bungled a software or hardware rollout to the same extent as HHS has, its stock would have tanked, and for good reason.
Apple likely had less than 2 years to prepare for its software rollout, which was targeted to upwards of 700 million users, and, save for one minor glitch which affected no one's ability to use the new software, had to be ready to go in dozens of languages around the globe from day one. As it turned out, over 200 million were able to successfully download and use Apple's new software in just two days, and well over half of Apple mobile devices have been upgraded to date.
Though terribly inapt on Obama's part, his comparison may prove to be very beneficial, since with more time we will discover more Obamacare problems, and with more time we'll discover that the economy can survive without the myriad ministrations of the federal government. Apple has already exceeded the expectations of hundreds of millions of users in a matter of days, whereas Obamacare will almost certainly fail to deliver on any of its promises in the next few months and years. Moral of the story: we'd likely be better off with less government intrusion, lower tax burdens, fewer regulations, and a healthcare system that relied more on private sector initiatives and less on government mandates to cut costs and expand coverage.
Perhaps the gold market is beginning to understand that the sound and fury coming out of Washington could be the beginning of the end of Big Government. Between now and next November, political discussions are almost certainly going to be dominated by the issue of whether or not our government has become too vast to function effectively. The failure of Obamacare to work as advertised, contrasted with the overwhelming success of Apple's iOS7 launch, will hold lessons aplenty for years to come. Would you entrust your health to government the same way you entrust Apple with the management of your digital life? I sure wouldn't, and maybe millions of others will come to agree with me. We didn't create the federal government to compete with private enterprise and individual initiative; we created government to ensure that private enterprise and individual initiative can flourish.
If, as a result of all this mess, government is more likely to shrink than increase in size and influence, then the outlook for the economy, I would argue, has improved. And that does not support a gold price that is still more than double its average, inflation-adjusted price over the last century.