Gold: ‘Inflation will beat deflation and gold will hit $3,000

This is a good article to expound my thesis of what is happening and where we are going.

The chappy writing this article gets it right and gets it wrong. Gold will certainly be higher in nominal and relative terms in the near future but the reasons for this turn of events are not what he offers.

Below I’ll copy some excerpts from the article and offer my comment:

” Gold looks set to move substantially higher as governments all around the world embark on a programme of “quantitative easing” – or printing money, as it could be more simply defined.”

GR – To be exact, the term is “competitive currency devaluation”. Something I’ve been discussing for a good many years now. Essentially, in a global economy largely based on exports and driven by one single largest consumer as is the USA (US GDP is over 40% of world GDP and is itself composed of 70% consumption), the onset of crisis, any crisis, will necessarily be met by currency devaluations in exporting countries. Currency devaluation may work in an inflationary environment as we’ve experienced since the turn of the last century but the downside is the debasement of the currency. Once governments are no longer capable to sustaining inflation, currency devaluation truly destroys a currency. In a deflationary environment, gold takes the role of currency of last resort.

” In the US for example the US monetary base, the most narrow measure of US money supply, has increased more in the past six months than the aggregate total of the past 20 years.”

True enough. However, chappy forgets to look at Money Velocity. If he bothered to look at that one metric, he’d realize that despite all the printing of money and the desire to inject the sums into the real economy, that is not happening. That’s because the authorities can print all the money they want but they cannot force businesses and individuals to borrow because they are already over indebted. Hence, bank reserves are skyrocketing but money velocity is dropping and, as of November 2008, fell below zero. This is known as “pushing on a string”.

” Many other countries are certain to follow suit as governments worldwide take a conscious decision not to suffer a 1930s-style economic collapse. This is fair enough but is not a cost-free exercise: the price will be much higher inflation further down the road.”

Again; true. But there is a “but”. Provided that the currencies that are being inflated today will survive this depression, there is a possibility that the sheer quantity of money in circulation may cause a bout of hyperinflation at some point once demand starts picking up at some unspecified date in the future. However, considering the amount of debt that has to be purged from the system, that day is nowhere near in time. the Bank of International Settlement estimates global obligations at something well over US$500Trillions. In comparison, global GDP is something in the order of US$40Trillions and dropping fast. Whichever way we turn the issue, we have to bridge a gap of about US$450Trillion of “estimated” wealth that, by and large, has no base in reality. The way I see it, inflation is not going to be a problem any time soon in the next ten years or even fifteen years.

” The consequences are crystal clear to most investors – gold is the ultimate safe haven from governments’ attempts to debase their various currencies, and will become the asset of choice for many investors wishing to protect themselves from these shenanigans.”

I agree if for different reasons. Time will tell.

” Oil and other commodities which have collapsed will now begin to bottom out before rising exponentially once the economic recovery kicks in.”

If, like me, you subscribe to the deflationary scenario, then you also realize that it’ll be a very long time before stock indexes will rise to anything resembling the levels of the recent past. Except for gold and gold shares of course. But not because of inflation which will be nonexistent for many, many years to come.

” Investors should listen to what the markets are saying about themselves rather than be overly reliant on what the economists are saying about the market. The message from the markets is clear and unambiguous: reflation, not deflation, will be the ultimate winner here”

Once again, time will tell. However, I don’t see how reflation can work until and unless businesses and households have cleared sufficient amounts of debt from their balance sheet to be able to start borrowing again thus re-igniting demand.

” If investors worldwide choose to switch 1pc of their portfolios into gold, the central banks will not have enough supply to meet that demand. Gold from mining has struggled to meet even jewellery demand for the past few years, never mind demand from investors.”

This is very true.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4967209/Gold-Inflation-will-beat-deflation-and-gold-will-hit-3000.html

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