Thursday, October 16, 2008

Don't Get Whacked by the Deflation Red Herring - Financial History's Biggest Sucker Punch

Gold Price Close Today : 805.30
Change: -30.20 or -3.6%

Silver Price Close Today : 9.660
Change: -48.2 cents or -4.8%

US Dollar Index Today: 82.41
Change: -0.04 or -0.1%

How do you spell R-E-L-I-E-F? "Government money." Well, I'll be switched, just switched. I am just so surprised I may never be able to get my jaw up & my mouth shut again. The Almighty Yankee Gummint announces a plan to buy shares in banks (read: give more money to favourites) and at the top of the list stands Bank of America, Citigroup, JP Morgan Chase, and Morgan Stanley. Oh, sure, sure, the "little" banks will also participate, but later, not right now.

And here's another odd note: in the midst of a world-wide financial meltdown the US Dollar can't seem to make much headway, closing today at 82.40, down 4 basis points. Altho it's only one day, one still has to wonder how much "deflation" that foretells. The articles screaming about "deflation" are already appearing, which saves the Fed and the Nice Government Men a lot of propaganda money. Fed's job, of course, is not to manage inflation but inflation expectations (thank you, Steve Saville). Nothing like a flurry of media-hype about the dangers of deflation to keep the public barking up the wrong tree.

People keep asking me, and I keep telling 'em, and will keep telling 'em, Look -- the government has just injected a couple of trillion bucks in credit & cash. How much deflation does that promise? Zero, maybe, less than zero, since all that will be added to the money supply after being created out of thin air. Is it possible that collapsing debt & derivatives could overwhelm the central banks' inflation cannon? Sure, but it's very unlikely. Go look at the G7 meeting's agreed upon points and tell me how many are deflationary. None, it's an agreement not to pump but to inundate with a tidal wave of liquidity. Yes, it hurts to see these silver and gold prices, to see the gold/silver ratio at a new high, to wonder (hand me that waste-basket, I need to puke again) whether this will all work out as I expect, but it would hurt worse to be whacked by financial history's biggest sucker punch. That's what I believe the deflation red herring is right now.

The paper silver price dropped 48.2 cents today to close at a new low, 966 cents, which gold fell 30.20 to stop at US$805.30. If (as a friend reminded me today) I tore the top off the chart and looked at silver and gold, I would be dismayed. However, two considerations stop my dismay. First, I believe the US government, and every other government and central bank, is intervening in the silver and gold markets to cap prices. Now don't even bother to wave your snide "conspiracy" remarks my way, because since 1934in the Gold Reserve Act the NGM have had a secret slush fund call the Exchange Stabilization Fund created for the explicit purpose of manipulating the gold price and currency exchange rates. Second, what would you hold in preference to silver and gold? US Dollars? Stocks? Euros? Yen? The only thing I would want to own is productive assets, a farm, a business, a manufactory, something capable of producing a stream of revenue.

So I come back in a circle to gold and silver. I'll just have to keep on buying it, whether the silver price drops to $8 and the gold price to $720.

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.