Attention Gold Bugs: Hyperinflation or Deflation?

It's being reported that there is very little supply of small quantities of gold. In fact, what little supply available is being bought for $100/oz. Over spot prices. It appears the small guy knows something the commodity markets do not. It makes you wonder if gold bugs have ever heard of deflation. Truly, the modus operandi of the financial markets has been inflation for nearly 70 years, but it's deflation that could unhinge the economy. It's hard to argue inflation with companies like GE (GE), Citigroup (C), Eastman KodaK (EK), Intel (INTC), and host of others selling at more than decade lows, not to mention the massive dislocation in the financial arena.

Here's a question for you: who's going to have the cash to buy your gold? The system is up to its neck in debt, maybe someone could exchange their mortgage for 100 of your gold coins. Your gold is reflective of wealth, and I don't know if you've noticed that there's less of that around; like $9,000,000,000,000 less as of last calculation.

It seems to me that the most overvalued asset in the world is either the 30 year treasury or gold. Now, I'd let you figure it out, but denial is hard to cure. So I expect gold to fall to the $600/oz. level at best, and possibly the $300-400 level. Study your history; you can bet hyperinflation, but if it's deflation, gold has a long fall lower. If you disagree, you can buy the streetTracks Gold ETF (GLD) in large quantity.

Disclosure: Long Money Market Funds, no position GLD

Comments

[dieuwer:]

Again, confusion reigns.

DEFLATION is a monetary phenomenon. If the money supply contracts, there is deflation. DELEVERAGING is a market phenomenon. If there are more sellers than buyers of stock, the price of the stock goes down, e.g. GE, Citigroup, Eastman KodaK, Intel.

Besides that, the "deflationroom" is getting awfully crowded with bears. Time to take the contrarian position?

2008 Nov 13 08:28 AM

[JustACommod...:]

I agree that it isn't the time to be long gold...It's a damned if you do, damned if you don't view:
1. If the world economy gets back on track, a chunk of the recent demand will slip away as the fear factor recedes.
2. If the world economy continues to plunge and deflation is the word, then gold is definitely out.
But this isn't a long-term view. It's a one to two year view.
The longer-term view has the US balance sheet looking more like Argentina's. The US will have to beg for money. This will eventually weaken the dollar, no matter what happens to US interest rates. Gold will then be a great buy, again.

2008 Nov 13 08:41 AM

[CLH:]

Deflation is already present. This will continue for years until our high debts have been eliminated (1930s). Forget gold and inflation.

2008 Nov 13 09:30 AM

[FoxV:]

Deflation Ha! You guys are all sucking in the fumes of Paulson's Bazooka

Less we forget Bernanke's Helicopter speech "Deflation: why it won't happen here"

I guess there's some spacious argument that you can make money available but you can get people to borrow, but that's a complete load of bazooka shells.

The US (world's largest debtor nation) is not Japan (World's largest creditor nation), and the American people (wasteful and financially naive) are not the Japanese people (conservative and frugal).

As the unwashed masses beg desperately to be "Stimulated" by congress again, paulson is loading up his 9 Figure bazooka to take another shot at the banks. Mean while Bernanke is setting up the Federal Reserve to be the lender of last resort to everyone.

And when my 0% interest Federally guaranteed loan comes in. I'm going to go out and buy those nicely reduce 400oz bars of gold, while my money can still buy anything at all.

Oh ya, and then I'm going to by a nice property on the Cayman islands and default on that loan.

See ya, wouldn't want to be ya.

2008 Nov 13 10:03 AM

[jetsby10:]

Who's going to have the cash to buy gold? I dunno, someone will. Hank Paulson has about 700 billion dollars in his closet right now.

2008 Nov 13 10:21 AM

[Matt Dean:]

Hey Caffee, please stop blogging. You're making a fool of yourself.

2008 Nov 13 10:21 AM

[jetsby10:]

Mr. Cafee might want to take a look at the price of GE during the 70s when we had massive inflation.

2008 Nov 13 10:33 AM

[Caltorguy:]

Isn't one way to "pay" off debt to inflate your way out of it? In contrast, if the Fed allows deflation to happen, won't the already huge US debt become crippling, well north of the 100% of GDP benchmark where things start to get pretty tough, and lenders start to worry? Same for corporate debt. Maybe what we should be looking at is not the 1930s but 1923...in Germany when that country essentially eliminated its war debt through inflation in the billions of %. The only people that made it through that period were those that held gold or foreign currency (which wasn't that easy to get). As for the US in 2009, trillion dollar deficits, or 7-8% of GDP don't lend themselves well to deflation.

2008 Nov 13 11:58 AM

[maverick:]

Gold doesn't default, and it won't go to zero either. 5,000 years of history says so. We'll see deflation for a while, but does anyone really believe they can sell enough Treasuries to cover the bailouts? No way. They will have to print as well. And that actually does debtors a favor and punishes those that loaned recklessly. If the debtor can remain employed, he can pay back the predatory lender with devalued dollars. We are seeing deflation from demand destruction, but inflation will take over when they finally get the banks to stop using the bailouts to clean their books and actually lend. Not for cars and houses, but the short-term letters of credit that cover imports. Worst Buy and Detroit are in trouble, but people still want bananas. Gold may indeed go lower, but anyone holding none is just plain foolish. Read the GLD prospectus and you won't touch it with a ten foot pole. Their gold is uninsured. They won't guarantee the purity of the bars. The operator of their depository may not even be bonded. And who operates GLD? The same thieves who got us into this mess. CEF is far safer.

2008 Nov 13 04:24 PM

[sixpackistan:]

I don't see how there can be deflation when the fed is printing money out the wazoo. That's a deal-breaker for me. Maybe you can explain that to everyone. I just don't understand how those two can happen hand in hand.

2008 Nov 13 06:12 PM

[nmelendez:]

Presently, i believe we are in the start of a Kondratief winter scenario. The outcome at the strong down period will be a depression. The problem this time is the US govt is hell bent on curving this normal cycle.
This will result not in deflation but hyperinflation. We will see S&P at 16000 but a can of coke will cost 5 bucks and a happy meal at McD's wil put you back 25 bucks. Your dollar will be worth 30 cents on the dollar. Plenty of paper, the world just doesn't want it. This hyperinflation will help us pay off our debt but the middle class is going to get all but wiped out.

2008 Nov 13 07:41 PM

[KBowen7736:]

Mr. Caffee,

You do not inject 2.7 trillion dollars of funny money into the economy(just in the last few months) and not suffer inflation. The sheer size of these numbers are lost on the nieve. It has been proven true that the US dollar will go down in inflationary flames ala Paulson and Bernanke. Enjoy the low gas prices while you can and buy gold when you can. Do you honestly trust the powers that be to provide you with a fiat currency that holds its value? Get real.

2008 Nov 13 09:42 PM

[Mark McHugh:]

"It seems to me that the most overvalued asset in the world is either the 30 year treasury or gold."

Yes Mark, one of them is the most overvalued asset in the world.

2008 Nov 14 12:44 AM

[User 298024:]

Joesixpackistan -

Printing excessive amounts of money can result in hyperinflation but there is a lag time involved. It is similar to the breaking of a dam - the greatest damage occurs much later than the actual event and is produced much farther downstream. It will take months, possibly a year or two before the effects of monetary inflation become apparent in the system. When the event does occur it will happen quite quickly and, if the mainstream media are involved, without much warning.

Regardless of where our economy is headed, the best plan is to get out of debt. Period.

2008 Nov 14 01:20 AM

[Bengunnscave:]

If you believe that the fiat currency will remain in effect going forward and therefore above average inflation due to ponzi perpetuation, then how smart is getting out of debt?

Nay, go in debt to your eyeballs (but not over your head) at low interest rates and push that payment out into the future where it will be payed off with inflated dollars.

Currency savers will be damned. Regarding credit mongers, as unfortunate as it is to say this...if you can't beat em', join em'... and use that 'good debt' to finance real things...gold, silver, sail boats, guitars, and yes that nice little house on the lake.

And if the whole thing craters, then you will have all that you need plus maybe that lender goes under and your loan evaporates (of course that will essentially happen with enough currency destruction regardless).

Cayman Island boy has a commendably similar plan. Expats and pirates will have the last laugh.

2008 Nov 14 02:48 AM

[FoxV:]

"Cayman Island boy has a commendably similar plan. Expats and pirates will have the last laugh. "

Funny you should say that Bengunnscave. Its not just that Cayman islands are a tax free zone and allow anonymous banking, but its also because I'm a sailor that the Cayman islands would be a good spot for me.

However if the Pirate title fits, I'll take it.

Arr' ye landlubbin scallywags yur capt'n Bernanke's going down with his ship and he's takin all you with 'im. Lest y'all forget, paper doesn't float.

Give my regards to Davey Jones

2008 Nov 14 11:25 AM

[praha1:]

Gold in terms of the Canadian dollar:

Canadian Dollar -0.98% 11/14-11:50 1.2222 0.8182 917.02 +27.57 +3.10%

The above is just an example. If you're Canadian as I am, gold trading at $917.02 canadian aint that bad. Of course it hit an all time high of $1075 canadian only a month ago (October 9th).

For just about anyone else (other than Americans), gold has behaved not just wonderfully but as the single best asset to have during these times of turmoil. All paper assets have simply fallen off a cliff.

One can argue that having one's money in United States Dollars would have been even better. But the fact is the USD is fundamentally unsound and becoming more unsound by the minute.

So I'll take my chances with gold. If gold drops, then I know the dollar Canadian will simply drop with it and my purchasing power will be retained. The same goes for just about any currency world-wide.

2008 Nov 14 12:08 PM

[merv:]

I'd like to learn more about gold in these uncertain times.

2008 Nov 14 02:31 PM

[Houstonnotny:]

On Gold Prices

Paper precious metals sets the prices......to hell with reality.....gold prices "could" tumble -- IF the ETF starts selling, and investors bail; if so, the paper manipulation will continue. BUT, deflation is my concern, and paper pricing feeds on the current situation.........IF gold breaks $650 on the downside, and deflation continues (which is likely with Paulson -- who knows how to buy bad investments from business - screw the little guy) -- it could....could over-react to the downside. Is $500 or $625 likely? It is if deflation continues, which is my bet; reflating takes time, and Paulson - Bernacke do not inspire confidence. The issue is "demand" and reflation - not bailouts for business greed. "Let's reward stupidity." Their policies seem to assume that, in an ideal world, which this is not, the right things will happen. Freedom in DC is not accompanied by common sense or intelligence -- this is evident from the lack of effective measures taken at the top. Stopping foreclosures requires definitive action, not the hope that banks will reduce P&I voluntarily. My bet - deflation continues, gold will be bargain priced -- possibly going lower than we suspect -- for a very, very short period of time. If it happens, bet against the herd, if you can. Inflation will likely return......but the bulls might have to run for cover 1st. Still, physical metal could prove to be far more valuable than currency -- if the economy gets really bad. Silver, gold or dollars..........the former might be preferred......Remembe... that during the time of Robin Hood, gold and silver still held value.......and if the supply of dollars increases by 20% -- each dollar must be worthless.

2008 Nov 14 07:36 PM

[montyman:]

Ummm, excuse me, but Eastman Kodak is a photographic film company in the age of digital photography. It's main market has been wiped out by the new technology. Do you think that could have something to do with the fact that it's share price is down, rather than assuming deflation???

2008 Nov 14 11:13 PM

[egec:]

From Bernanke's "deflation - making sure it doesn't happen here" he points out the following (btw..when he says stocks had one of the best years of the century - to quantify that statement the s&p was up over 70% in 1934):
www.federalreserve.gov...
"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation. "

2008 Nov 25 10:04 PM

[Skip Sanders:]

"Here's a question for you: who's going to have the cash to buy your gold?"

I guess you miss the point...The Gold will act as money in exchange for goods and services. Even if deflation does occur (as it always does before hyperinflation), the purchasing power of the gold and/or silver will remain consistent with the goods and services it can purchase. Example : 1963 Quarters were 90% silver holding 1/4 of 1oz of Silver. The average price of gasoline in the US was 0.24 cents a gallon. Today, silver is trading for roughly $10.25. So 1/4 of an oz of silver is worth a $2.56 cents. I suggest I can buy a gallon of gas just about anywhere in the US with a 1/4 of an oz. of silver (exchanged into FRNs'). So silvers' purchasing power is protected from both inflation and deflation. Metals are not an investment, they are a savings mechanism. In deflation, the price of gold and silver will decline in dollars as will all goods and services in relation to dollars.However, gold and silver will remain consistent when compared to good and services they can be exchanged for. So their in no loss in purchasing power during deflation, or gain for that matter during inflation. However, gold and silver have NEVER been worth nothing..while every FIAT Currency known to man has eventually become worth nothing.
One final note, comparing the 1930s' Gold Standard monetary system to todays', Debt Based monetary system is truly an apples and oranges argument. Are you actually paid for your economic analysis?

2008 Nov 29 07:09 PM

[Bullionmaster:]

Deflationary environment will only last until Jan 21st, 2009. Paulson and Bernanke will move on and their replacements will implement a liberatarian plan of print and spend under the Obama administration. Banks, Detroit, California, Nevada, Florida, etc. etc. will all see federal stimulus and yes, even mainstreet will finally get some help as mortgage rates will drop to 4%. This drop in mortgage rates will give homeowner new money to spend and America will use the money to purchase all the things they were not able to afford or didn't buy because they were hoarding their money like the banks afraid of the unknown. The thanks will go to the FDIC for bringing this program into reality and America will extend itself into another bubble of some sort eight years from now. Innovation, intelligence, ingenuity, and effort will resolve this situation and Obama and his court will deliver on their promise.

2008 Dec 13 12:07 AM

[Bravekind:]

Interesting discussion, and getting more interesting everyday! Which way did gold go in the last deflationary period in terms of dollars?

From Ben's speech in 2002

"Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures,
were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year."

And the Price of gold:

Average yearly gold price.
1930: $20.65
1933: $26.33

If past is prologue, best to stick with the gold, even in deflationary times.

Jan 31 08:16 PM