Tuesday, April 15, 2008

Will Gold Deflate Seriously During a Recession or Depression?

Gold Price Close Today : 928.70
Gold Price Close Yesterday: 925.40
Change: 3.3 or 0.4%

Silver Price Close Today : 17.830
Silver Price Close Yesterday: 17.768
Change: 6.2 cents or 0.3%

US Dollar Index Today: 72.02
US Dollar Index Yesterday: 71.861
Change: 0.15 or 0.2%

Since these sideways markets are so dull, I'll liven things up a little. A reader asks, "I wonder if you might comment on a prevailing view that gold and other commodities will deflate seriously during a recession or depression."

First, most people, even most economists who ought to know better, misuse the terms "inflation" and "deflation." They have nothing to do with prices, only with money supply, whether it is being expanded ("inflated") or shrinking ("deflated"). Other things being equal, inflation will lead to higher prices generally, and deflation to lower prices.

In the 19th century, inflations lowered the value of silver and gold, while deflations raised them as the bank paper money that had cheapened them was destroyed. See Roy Jastram, The Golden Constant. Since currency became irredeemable into gold and silver throughout the world, the metals' reaction changed. Since the Great Depression gold and silver have functioned as alternative currencies. During inflations, people flee to them, raising their prices. As far as deflations are concerned, there hasn't been one since the 1930s, so who knows?

It really doesn't matter anyway, because with all due respect to the fine minds who believe that our present monetary madness will end, like the Great Depression, in a deflation, that will never happen. How can I be so sure? Because the deflation whipped the Establishment and its central bank (the Fed), so they have spent the last 80 years building an institutional framework that automatically inflates whenever anything like deflation can be snuffed in the air.

Therefore, there will be no deflation in nominal terms, but a hyperinflation. The Fed has one and only one weapon, inflation. Will they use it to stay in power? They would shoot their mother in front of a cop to stay in power, so they won't blanch at destroying the US dollar. They will destroy, and are now destroying, the US dollar.

In real but not nominal terms the money supply will be shrinking in value during a hyperinflation, so will cause depression or chronic recession. The worse the inflation, the worse the depression.

The outcome of all this mess will be a hyperinflationary depression. Watch Bernanke: he is proving it now. He hasn't yet dropped money from helicopters to the waiting crowds below, but the government is sending checks -- big checks -- to everybody who paid taxes last year. And he is using the Fed to buy rotten assets from his Wall Street cronies, and loan them mega-bucks. The Fed has only the inflation gun, and they will keep on shooting it until the US economy dies of hyperinflation. It may take a month or a year or five years, but their feet are already on the road to suicide. I cannot even contemplate the devastation. But there will be no deflation. In the US, politics trumps reason and economics every time.

As far as the markets go, nothing changed today. Watch the ranges I have been noting for upside or downside breakouts. Keep expecting the silver and gold rally to extend. Stay out of stocks. Learn to grow a garden. Buy silver and gold, and make friends with your family. You'll need them.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

"Buy Silver and Gold Coins at the Best Prices"

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down.