Why Aren't Interest Rates And Gold Going Up?

Keynes relaxing and considering potential beauty contest choices of others.

 James Freeman, who always asks intriguing questions, writes at The Wall Street Journal:

This column has been surprised that America’s asset managers have not reacted more aggressively in response to the inflation threat.

This is a common perspective that I believe is similar to the John Maynard Keynes' "beauty contest" view of investing.

From Economicae: an illustrated encyclopaedia of economics:

The Keynesian beauty contest is the view that much of investment is driven by
expectations about what other investors think, rather than expectations about the
fundamental profitability of a particular investment. John Maynard Keynes, the most
influential economist of the 20th century, believed that investment is volatile because
investment is determined by the herd-like “animal spirits” of investors. Keynes
observed that investment strategies resembled a contest in a London newspaper of
his day that featured pictures of a hundred or so young women. The winner of the
contest was the newspaper reader who submitted a list of the top five women that
most clearly matched the consensus of all other contest entries. A naïve strategy for
an entrant would be to rely on his or her own concepts of beauty to establish
rankings. Consequently, each contest entrant would try to second guess the other
entrants’

In an EPJ Daily Alert this week, I responded to a subscriber comment with regard to the strong CPI number and the fact that silver declined at the same time:

Biggest inflation print since 1981.....

And silver is down lol

 RW response:

On a long-term basis, markets react to fundamental supply and demand. In past ALERTs, I outlined how slowed jewelry purchases because of the lockdowns and slowed central bank gold purchases caused gold price weakness in the second half of last year. Both these sectors are buying again (except for some slowdown in India because of COVID). But this type buying is the important long-term buying. With the Fed and most other central banks printing money, people who are regular gold and silver buyers have more money to buy gold and silver (In addition, more buying will occur for silver because of its use in the green movement). The buying because a CPI or PPI print is higher comes in a later phase when new buyers are attracted to gold (probably not until $2,500 per ounce plus). The buying now, the heavy lifting, will be done by regular buyers (including jewelry buyers and central banks).  As technical resistance levels are broken, more traders will be attracted into the market and down the road new crowds but we are not there yet. This is from my perspective, the last buying phase opportunity for us The money is in the system, it is trading the way you would expect it to trade and prices will punch through resistance---and then the crowd gets in but not now. We still have a small, in terms of time. buying period but it is not going to last very long.

The idea that it is crowds that always drive markets (and just react to short-term news) is just not the case. In most cases, it is fundamental buying and selling factors that drive markets. Put another way, beauty contests are not run every day.

The beauty contests are not now occurring in the bond market (interest rates) and the gold (and silver) markets.

At present, interest rates on bonds remain low because of the massive amount of Federal Reserve bond buying. At some point that will flip as it becomes extremely profitable for investors to borrow money at low rates to profit from the ongoing price inflation. NOTE: This is about investors being able to arbitrage price inflation against borrowing rates. It is not about bond traders "thinking" rates will go higher (nor is it about "bond vigilantes"). It is real-world borrowers with enormous thirst for real-world borrowing. The crowd follower trading does not occur until much later.

The same thing goes for gold (and silver), there is a lot of money around so the traditional buyers of gold have much more money available to them to do gold buying. It is only in later stages when gold is already on the run that the crowds get in,

Traditionally, crowds get in only after the momentum is hot and heavy for some time. They then react to the headline news.

But the non-headline accumulation phase, from traditional buyers, comes first.

 -RW