20-May (NPR) — Hi, it’s You should send us questions on or , but this particular question, though timely, was made up by me, sorry:

Q. Should banks be required to hold much more capital as a safety net? Or should they be putting that money to productive use by lending it out instead?

Naaaaah, just messing with you. The recent debate over bank capital, sparked by Anat Admati and Martin Hellwig’s book and the in the Senate, has had at least one unambiguous effect, which is that it is now fashionable in certain circles to say “banks don’t hold capital” in the tone of voice formerly reserved for correcting split infinitives or declining ketchup on your hot dog.

Banks don’t hold capital! And bank capital isn’t money kept in a vault – it can be put to productive use, too.

…The disadvantage of making banks have much more capital is, also, that it makes the risks clearer. Banks exist to hide risk: to take money entrusted to them for safekeeping and lend it out to fund the risky activities that help our economy grow, without scaring people about the risk. Banks “exist to hide such information; they are created and structured to keep secrets.” The secret being: someone might lose money!

[source]

PG View: Ask a Cyprus bank depositor; I’m pretty sure you can find many that will confirm that last part. Mitigate the risk they’re hiding by putting at least a portion of your savings in gold.

“While mainstream news sources continue the war against gold and gold-related investments, three of the world’s top performing hedge fund managers have been busy at work building speculative gold positions during the first quarter. George Soros, John Paulson, and Steve Cohen, who in aggregate control over $60 billion dollars, have been aggressively buying the most speculative vehicles associated with gold: call options on gold mining stocks.”

Bull Market Thinking/Tekoa da Silva/5/18/13

MK note: So all the negative hype about Soros selling his ETF gold position is just that “hype.” Hedge funds are charged with maximizing returns and beating the market averages (seeking alpha). To do this, they employ often times complicated strategies, usually with leverage, and go where assets are undervalued. This trio of hedge fund managers would not be buying yellow metal in various forms and representations, if they didn’t think the gold story rested on a solid foundation — a position the opposite of the tale the mainstream financial press and Wall Street have been weaving the past several weeks.

“This prebubble euphoria only undermines the Federal Reserve’s fragile credibility. It reinforces the notion that it seems to know only two things: how to inflate bubbles and how to studiously not recognize them.”

Jesse Eisinger, ProPublica, 5/15/2012

MK note: Inflation no longer “besieges” economies so much as it rolls through them consuming one segment of the markets or another in what we have come to term “bubbles.” Now the inflationary bubble appears to be rolling anew through the stock and real estate markets. This article, if nothing else, serves as prewarning about the prebubble — a well-written, provacative look at why the hedge funds, and other major market players, no longer trust the Fed to provide a heads-up when this roller-coaster ride might be heading over the top.

Sometimes you find important pieces of information quite unexpectedly — sometimes welcome, sometimes unwelcome. This morning my Financial Times did not show up at the door as it normally does causing me to pick up one of last week’s issues. I store the older issues that I never got around to for just this kind of occasion. There I spied the headline “Doubts grow over ‘decade of Latin America.’” Having missed the ‘decade of Latin America’ or at least not knowing that such an event had transpired until I read that headline, I decided to wade in and see just what it was I had missed. What I found was a welcome nugget of info about a third of the way through the article that seems to have been thrown in for good effect. It stopped me in my tracks:

“The windfall from the commodity boom which began in 2002, has been huge,” wrote FT’s John Paul Rathbone. “The IMF estimates it was equivalent to an extra 15 per cent of output a year. But now China’s slowing economy has undercut commodity prices, raising questions about how long the ‘commodity supercycle’ will last. The average length of these supercycles is 30 years, estimated José Antonio Ocampo, a Columbia University economist, in a recent study. ‘That puts us about halfway through this one,’ he says.”

Now. . .Anyone who knows about gold also knows that it is generally thrown in with the rest of the commodities — soybeans, lead, aluminum, weather futures, et al — even though the purists among us regret that designation. For discussion purposes, let’s at least assume that gold benefits from commodity booms and suffers from commodity busts — even though I am sure there have been occasional exceptions to this relationship.

With that in mind, I put together the following chart using the International Monetary Fund’s commodity price index stats:

As you can see, the starting date for the commodity boom is, as Financial Times says, in the vicinity of 2002-2003. As such we are not even half way through the 30-year cycle (The midway point would be in the vicinity of 2017-2018.) The end to the cycle by professor Ocampo’s formulation would not come until about 2032-2033!

Having laid all that groundwork, I hasten to conclude that I did have a reason for going through this roundabout exercise and that is to address directly all the rhetorical jibes I have seen lately directed at gold: That this is “the end of the bull market;” we’ve come to “the end of the road for gold,” etc., etc., etc.

The observable evidence states otherwise. The same thing could have been said about the rigorous correction in commodities in the fateful, pivotal years of 2008-2009. Then the commodity price index dropped 55% and gold lost roughly 25% of its value, yet gold and the complex in toto somehow recovered. Before we become overly weighed down by the short-term, it is always a healthy exercise — and a steady rule of prudent judgement — to put things in their proper perspective.

Back to the “decade of Latin America” . . . . . . . .