I’ve often been impressed by the ability of gold-focused bloggers, newsletter writers and journalists to turn a blind eye to the gold market’s genuine fundamentals and to fixate on factors that either have no bearing on the gold price or amount to unadulterated hogwash. Depending on how they are presented, the stories that are regularly told about the COMEX gold inventory and its relationship to the gold price can fall into either the irrelevant category or the hogwash category.

I’ve mentioned numerous times in the past, including in an 18th August blog post, that the amount of gold in COMEX warehouses and the inventories of gold ETFs follow the major price trend, meaning that changes in these high-profile inventories are effects, not causes, of major changes in the gold price. That’s the long-term relationship. On a short-term basis there is no consistent relationship between inventory levels and the gold price.

There is therefore nothing strange about the fact that the post-2011 bear market in gold has been accompanied by an overall decline in COMEX and gold ETF inventories, just as there was nothing strange about the overall rise in COMEX and gold ETF inventories during the preceding bull market.

I’ve also briefly pointed out in the past that the large rise in the ratio of COMEX “registered” gold to COMEX gold open interest in no way indicates a shortage of physical gold or that a COMEX delivery problem is brewing.

Various sites have been presenting the aforementioned ratio for years as if it were a dramatic, price-impacting development. A recent example is the ZeroHedge article posted HERE, which contains the following chart. This chart certainly creates the impression that something is horribly wrong. A more distant example is the JSMineset article posted HERE, which is from July-2013 and forecasts a COMEX crisis within 90 days due to the critical shortage of deliverable gold.

Fortunately, early this week a logical and well-informed article on the topic was posted HERE. You should read the full article as long as you are willing to let facts get in the way of a good story, but two of the key points are:

1) The amount of “registered” gold is NOT the total amount of gold available for delivery.

2) Although it’s unlikely to give you any meaningful information, if you really want to spend time comparing open interest and physical gold inventory then it’s only the open interest in the current delivery month that matters.

It’s hard enough to figure-out the gold market when considering only the true fundamentals. There’s no need to further muddy the waters by introducing spurious information, unless the goal is to draw readers with exciting stories rather than to be accurate.

If something very strange happens and continues over an extended period, people get accustomed to it and come to view it as normal. That’s especially so when the strange set of circumstances is the result of a policy that, as a result of devotion to a wrong theory or strategy, is widely considered to be a reasonable response to a problem.

A good example is the “Patriot Act”, which was introduced in the wake of the 911 attacks. This act dramatically increased the legal ability of the US government to violate individual property rights in the name of greater security and was widely viewed as extraordinary when it was first proposed, but in 2011 there was barely a mention in the mainstream media when President Obama signed a 4-year extension for some of the most controversial parts of the act. With some modifications forced upon the government by the revelations of Edward Snowden, another 4-year extension was approved with minimal public protest in 2015 under the Orwellian name “USA Freedom Act”. My point is, whereas 20 years ago most people would have been horrified by the provisions of the Patriot Act, today most people couldn’t care less. Today, the powers granted by the Patriot Act are generally accepted as normal.

Another good example is the downward drift into negative territory of government bond yields in Europe. As recently as two years ago it was believed by almost everyone that zero was the lower bound for a bond’s nominal yield. At that time, the idea that nominal bond yields would fall to zero was almost unthinkable, and anyone who predicted that a sizable percentage of the bonds issued by European governments would soon trade at negative nominal yields would have been perceived as a lunatic. Today, however, about one-third of the euro-zone’s sovereign debt is trading with a negative yield-to-maturity and people are becoming accustomed to this new reality. Also, the ECB just reduced its official deposit rate from negative 0.20% to negative 0.30%, which only surprised the financial markets because most traders were expecting it to be pushed even further into negative territory.

A point that deserves to be emphasised is that even though the financial world is becoming inured to the situation, it is completely absurd for interest rates and nominal bond yields to be negative. The reason is that regardless of whether the economy is experiencing inflation or deflation, having money in the present should always be worth more than having a promise to pay the same quantity of money in the future. To put it another way, it should never make sense for people throughout the economy to choose to incur a cost for temporarily relinquishing ownership of money.

But obviously it does make sense, because it’s happening! The question is why.

A number of factors had to come together to make negative interest rates possible, including persistently-low inflation expectations in the face of rapid monetary inflation. However, the overarching cause is unswerving devotion to bad economic theory. Persistently-low inflation expectations only enabled the application of bad theory to be taken to a far greater extreme than it had ever been taken before.

The bad theory is that the economy can be made stronger by artificially lowering the rate of interest. If you have the power to manipulate interest rates and you are totally committed to this theory, then a failure of the economy to strengthen following a lowering of the interest rate will cause you to bring about a further interest-rate decline. As long as you remain steadfast in your belief that a lower interest rate should help and as long as rising inflation expectations don’t get in the way, continuing economic weakness will lead you further and further down the interest-rate suppression path.

The Fed currently looks less radical than the ECB, because, while the ECB has pushed its targeted interest rate into negative territory and shows no sign of changing course, the Fed is probably about to take a small step into positive territory with its own targeted interest rate. However, the senior members of the Fed and the ECB are guided by the same bad theories, so it is certainly possible that the next time the US economy slides into recession the US will end up with a negative Fed Funds Rate. In fact, if the US economy slides into recession in 2016 then a negative Fed Funds Rate will become a good bet.

In conclusion, today’s negative interest rate situation would have been viewed as nonsensical as recently as a few years ago and will be viewed as nonsensical by the historians who write about the 2010s in decades to come. However, the financial world is not only becoming accustomed to this absurd situation, it is now common to view negative interest rates as appropriate.

To develop a popular newsletter or blog focusing on finance and investment, you don’t need to offer anything of real value. You just need to adopt all or most of the following guidelines/suggestions.

1) H.L.Mencken wrote: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” The same approach can be applied to the financial writing business. Specifically, the main goal of practical newsletter-writing and blogging is to keep the readership alarmed (and hence clamorous for advice) by menacing it with an endless series of hobgoblins, most of them imaginary.

2) If your analyses and recommendations prove to be on the mark then give yourself a very public ‘pat on the back’ for having been incredibly prescient, but if your analyses and recommendations prove to be off the mark then put the blame on market manipulation and quickly move on. Never acknowledge the possibility that your analysis was wrong.

3) Grab every opportunity to re-write the history of your own performance with the aim of creating the impression that your forecasting record is much better than is actually the case. This will work because a) if you claim often enough and assertively enough that you correctly predicted a major market move, it will eventually be perceived as the truth, and b) most of your old readers won’t remember and most of your new readers won’t check what you wrote in the past.

4) Word any ‘analysis’ in such a way that you will be right regardless of what happens. Here are some examples:

a) A non-specific forecast of higher volatility is always good, because it will always be possible to subsequently find a market or a region in which volatility increased.

b) Present multiple scenarios that essentially cover all possible outcomes.

c) Present forecasts/assessments in the format: Bullish above A$, bearish below B$. When the price moves above A$ or below B$, generate a new forecast in the same format. This way you will always be 100% accurate without ever providing useful information.

5) Emphasise the forecasts/recommendations that have worked and forget to mention, or only mention in passing, the ones that didn’t work. For example, publish a list showing the large gains made by some of your past recommendations and add a note to the effect that not all of your recommendations resulted in such spectacular success. This has the advantage of creating a totally false impression of your performance without actually being a lie.

“There are many ways of calculating purchasing power by means of index numbers, and every single one of them is right, from certain tenable points of view; but every single one of them is also wrong, from just as many equally tenable points of view. Since each method of calculation will yield results that are different from those of every other method, and since each result, if it is made the basis of practical measures, will further certain interests and injure others, it is obvious that each group of persons will declare for those methods that will best serve its own interests. At the very moment when the manipulation of purchasing power is declared to be a legitimate concern of currency policy, the question of the level at which this purchasing power is to be fixed will attain the highest political significance.”

The above paragraph contains remarkable foresight considering that it was written by Ludwig von Mises way back in 1934 (it is from the preface to the 1934 English edition of “Theory of Money and Credit”). In particular:

1) There are now more ways than ever of coming up with a number that purportedly represents the change in money purchasing power (PP), with different groups advocating on behalf of different numbers depending on their agendas. For one example, the US government likes the Consumer Price Index (CPI), because its rate of increase has been very slow for a long time (enabling cost-of-living adjustments to be minimised) and because the calculation methodology can always be changed by the government if the result deviates too far from what’s deemed acceptable. For another example, the Fed likes the Personal Consumption Expenditures (PCE) calculation, because it tends to be even lower than the CPI and therefore shows the Fed in a more positive light and gives it more flexibility. For a third example, at the other end of the spectrum there are the perennial forecasters of hyperinflation who are always on the lookout for ‘evidence’ supporting their outlook. This group likes the Shadowstats CPI, even though the Shadowstats calculation contains a basic error that makes the result unrealistic and leads to ridiculous conclusions regarding GDP growth.

2) The manipulation of PP is most definitely now deemed to be a legitimate concern of currency policy. In fact, it is generally deemed to be the primary concern.

3) The question of the level at which PP is to be fixed has attained the highest political significance, with senior policy-makers throughout the developed world having almost simultaneously arrived at the conclusion that 2% is the correct level for the rate of annual PP loss. As a consequence, economies and financial markets are now being constantly pummeled by central-bank interventions designed to ensure that monetary savings lose about 2% of their PP every year.

It would be nice if prices returned to being indicators of genuine supply and demand, as opposed to being the effects of the central bank’s latest attempts to make an arbitrary index of prices match an arbitrary target.