When Price Discovery Dies

The FED has now made it quite clear that it will not allow the stock market to fall, which means that price discovery has been disabled. Anyone with access to cheap credit can make money by borrowing as much as possible to buy stocks. On the other hand, those who sell stocks for cash will see their wealth fall, relative to those who stay in the stock market.

However, the FED cannot control the price of gold in the same way it can control the price of shares. Relative to gold, shares may go up or down. Price discovery relative to gold remains in place. It is only the US dollar that has been disabled, not the market as a whole. With price discovery relative to the dollar now effectively disabled, gold will have to function as the unit of account.

The implication of this is that anyone with savings in dollars should buy gold. With cash essentially dead as far as price discovery is concerned, only gold will correctly reflect prices.

By Unknown - Oslo Mynthandel, Public Domain, Link