Why Salvation to Economic Disaster Lies With Gold
By Jon A. Nones
30 Dec 2005 at 04:02 PM EST
St. LOUIS (ResourceInvestor.com) -- It has been a good year for gold bugs. Today, gold futures closed at closed at $518.90 an ounce on the New York Mercantile Exchange, up $1.40 for the session. A year ago, the contract closed at $453.10, a gain of $65.80 or 14.5% in 2005. In an interview with Resource Investor, Jay Taylor, editor of the Gold & Technology Stock Report, said gold will continue to rise - but at the expense of the U.S. economy.
According to Taylor, the U.S. is heading towards a period of outright deflation. Soon, the Fed will no longer be able to keep the economy from imploding into a cascading debt default like we had in the 1930s, he said.
“There is no way of telling when we will reach the tipping point. But we will not likely see a new high for the equity market as a whole in the U.S. in our lifetime,” said Taylor.
With each monetary infusion aimed at overcoming deflationary pressures, deflationary pressures are growing all the more, Taylor said. Why so?
Because debt is the raw material from which money is manufactured in a fiat currency system, he answered. Debt is growing exponentially while income is growing in a linear fashion (see chart).
resourceinvestor.com
“It is rather shocking I think, and more than any other one picture, this tells why I think ultimately we end of with a deflationary collapse. The only question is whether we get hyper-inflation before the dreadful bust.”
Taylor created an “Inflation/Deflation Watch” as an indicator not only for predicting rising levels of inflation, but also in identifying areas that are rising more rapidly than the dollar is losing value.
In Taylor’s December newsletter, the Inflation/Deflation Watch indicates that 2006 will give us an even more rapid decline in the purchasing power of the dollar.
Three components of the Inflation/Deflation Watch, measured during the first 10 months of 2005, pushed the reading toward deflation, Taylor said.
*
Rogers (commodities)/Gold – Down 10.69%
*
U.S. Dollar/Gold – Down 14.78%
*
U.S. Global Liquidity Growth – Down 34.35%
First and most important was a 34.35% decline in the rate of U.S. dollar global liquidity from 14.47% to 9.67%, he said.
“At one point, this measure of global liquidity was growing at an annual rate of over 20% as Greenspan put the pedal to the metal to avoid deflation in 2003,” said Taylor.
The other two measures have to do with gold relative to commodities and the U.S. dollar. Gold rose faster than both of those items, which can be viewed as deflationary, he said.
Many investors see “helicopter” Ben Bernanke as further reason for concern, especially after suggesting that money should be created from whatever source is required to keep the economy rolling.
“In my view, Bernanke will be even more inflationary than Greenspan,” Taylor said.
According to Taylor, the most alarming proposal Bernanke has come up is the notion that the government could tax savings by perhaps 1% per month – thus imposing a negative interest rate. This would in turn force people to keep spending in order to ward off the depression/deflation.
“This of course is a socialist policy on top of all the others,” said Taylor. “It is exactly the opposite of what we should be doing, but given where we are now, more and more ‘heroin’ must ingested to delay the painful withdrawal. Eventually of course the heroin patient dies,” said Taylor.
Taylor concluded in his newsletter by saying “we need to buy assets that will rise in value at least as rapidly as the dollar purchasing power declines.”
Taylor told RI that gold is a good bet.
“Gold for either inflation or deflation. Gold stocks for the same reason, and perhaps some silver in there too,” Taylor said.
resourceinvestor.com |
