Should PBoC be blamed for the collapse in gold prices?

The graph below shows the yearly growth rate of Chinese currency reserves and the yearly change in the gold price. If the Chinese central banks stops intervening in the currency markets to curb the strengthening the yuan then it effectively is monetary tightening – the FX reserve accumulation will slow as will money supply growth. 

goldFXRChina

 

I will leave it to my readers to speculate whether the People Bank’s of China should be blamed for the drop in gold prices. 

 

Never reason from a price change – the case of commodity prices

The big story in the financial markets this week is the continued decline in commodity prices – particularly the drop in gold prices is getting a lot of attention.

The drop in commodity prices have led some people to speculate that this is an indication that the global economy is slowing. That may or may not be the case. However, as Scott Sumner like to remind us – we should never reason from a price change. 

We have to remember that the price of commodities can drop for two reasons – either demand for commodities declined (that would be an indication that the global economy is slowing) or because of a positive supply shock (that on the other hand would be good news for the global economy).

The good news graph…

Supply demand supply shock And the bad news graph…

Supply demand demand shock

This is not the place to speculate about whether we are in the “bad news” or the “good news”, but global markets are nonetheless telling us that this is not the time to panic – global stock prices have been trending upward, while commodity prices have been declining.

MSCI CRB

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David Glasner also comments on the gold price – he has more interesting things to say than I have.

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