Old but still worth a read IMHO Inflation vs Deflation
Message 16040459
Hi Craig,
Good point!
Well, since u asked, let me include some links from some well established authors. I will include quotes & cite the URL for your inspection. I will not comment, since u will obviously want a quote from GOLD oops... sorry, I meant GOD...
So let me educate u...
believe this, and don't forget it: Neither Alan Greenspan nor Robert Rubin nor any other finance minister nor central banker sweats inflation. Inflation is manageable, but deflation is fatal. Like AIDS, once it attacks the financial system, there is no cure... ... Not very many writers seem to know that gold performs much better during deflations than inflations.
Nevertheless, gold does maintain its purchasing power over long periods of time. The intriguing aspect of this conclusion is that it is not because gold eventually moves toward commodity prices, but because commodity prices return to Gold ie:... If Jastram's "retrieval phenomenon" means anything, it is that the price of gold versus a basket of commodities tends to return to the same level over time, i.e., gold preserves purchasing power over long periods of time home.hiwaay.net
This table lays out Jastram's periods with the change in commodity prices, as well as the change in purchasing power of gold and silver.
Inflation Deflation Commodities Silver Gold
1808-1814 +58% -33% -37%
1814-1830 -50% +89% +100%
1843-1857 +48% -30% -33%
1861-1864 +117% -53% -6%
1864-1897 -65% +27% +40% (remember 'railroads')LOL
1897-1920 +232% -49% -70%
1929-1933 -31% -5% +44% need I say more
1933-1951 +168% -4% -37%
1951-1979 +158% +380% +240% (who know's what happened )
Deflation Hedge: Gold & silver's profitable performance under so many past deflations strongly argues that they will perform well in future deflations. Under a regime of debt money a deflation means a collapse (implosion) of debt. Unlike any other financial assets, gold and silver are not backed by debt. Whenever creditworthiness is called into question, demand for gold and silver will rise
On Robert Mundell...When the US disconnected the dollar from gold in the late 1960s, Mundell was a lone voice warning of the danger of floating exchange rates. He predicted, in the face of considerable ridicule, that the world would eventually shift back to a gold standard by 1980. He was dead wrong on that account, but his work on gold as an independent monetary marker is remarkably prescient. For example, the change in the gold price from $35 in 1950 to $350 an ounce into the 80s matched precisely a tenfold increase in US national debt. Similarly, homes that cost $10,000 in 1950 increased to $100,000 over the same period. Gold's decline to less than $300 an ounce since 1996 has been matched by rising US budget surpluses.
Wanniski warns that if the US government tolerates gold drifting below $270 an ounce, then we can expect: "a series of declines in corporate earnings, bankruptcies, layoffs, unemployment, until the whole economy is adjusted to the lower gold price. Unless the problem is fixed, it could drag the administration down with it. Bush junior??
(kinda of sound like the Kemp article from a week or so ago...note the date on this article). & ""The contraction part can be overcome by lowering short-term interest rates or cutting marginal income-tax rates and capital-gains taxation. The deflation part of the problem can only be rectified by having the Fed add sufficient liquidity to cause gold to climb back over $300. Otherwise, there will be an slow, grinding, downward adjustment of all dollar prices -- the mirror image of the slow, grinding upward adjustment of all dollar prices that we knew as the inflation of the 1970s."
mips1.net
& any comments about this...Gold was at $385 when the deflationary process began. In our classical framework, inflation begins with a rise in the price of gold and deflation begins with a decline in the price? Believe it or not I think we are in a major deflationary enviroment... just look @ the commodity prices...
Interesting... White House connection . The White
House instead had Deputy Treasury Secretary Larry Summers call me. I met with him in April 1997, but while he treated me with respect, said he could not buy my gold argument. I'd told him we could expect a decline in the oil price, then farm prices, just as we had been warned in January 1972 by the 1999 Nobel Prize Winner Professor Robert Mundell to expect a rise in oil prices and other commodities. You know what happened.
mips1.net
Fasinating speach by Kemp IMO... way back in 1982 polyconomics.com
polyconomics.com. are most definitely in a monetary deflation, although prices are higher for the moment because of the disturbances in oil caused by that deflation... freerepublic.com
Very interesting quote "Not Just Another Commodity
Recent studies give support to Mobius's new monetary proposal. According to these studies, gold has three unique features: First, gold provides a stable numeraire for the world's monetary system, one that closely matches the "monetarist rule." Second, gold has had an amazing capacity to maintain its purchasing power throughout history, what the late Roy Jastram called "The Golden Constant." And third, the yellow metal has a curious ability to predict future inflation and interest rates"
Luskin on Gold thestandard.com
tscpro.thestreet.com
& finally... I'm too tired to continue on...
gold-eagle.com
You may accuse me of being a "gold-bug", but that is not
true...
I try to emulate G. LOEB. By darting here & there like a rabbit. I, of course, have a long, long, way to travel before I reach his plane... FWIW
Regards,
Peter
Message 16046377
Hi Craig,
Can you tell me how he arrived at his calculations?
>>) he lists the purchasing power of gold, rather than how it did in absolute terms. how did he arrive at it's purchasing power? without telling us, how can we know that his methods for calculating purchasing power are valid
1) Okay, I won’t tell you… but I will tell you this… Peter L. Bernstein (author of “The Power of Gold”) ISBN# 0 471 25210 7 didn’t have a problem quoting Jastram… “…As each currency broke away from gold and was devalued, a unit of each currency bought less gold than before – that is, the price of gold went up…In contrast, the prices of goods and services in all countries had fallen by substantial amounts. The result was that an ounce of gold in the mid-1930’s could buy twice as many goods and services as that same ounce could have bought in 1929 pg. 323-324
I’ll have to do further research to determine what Jastram’s criteria was (if that is available)
Gerald M. Loeb in his book "The Battle for Investment Survival" ISBN # 0 471 13297 7 on pg.117 describes gold shares in general “…Over a period of many years, they (gold) came nearest to the perfect means of preserving current purchasing power for future use, i.e., hoarding of metallic gold where it is legal. … and … Gold shares are devaluation hedges” & finally (interesting Loeb is aware of cycles way back then…) “…for a long while, chiefly because of political regulation but partly because gold like everything else moves in cycles, the times have been against them”
Pretty insightful (IMHO) for a trader who wrote the above sentences in a book that was published in 1935. (which means that pen was put to paper much earlier… maybe a year of so earlier. (To put that into context, imagine writing an article about the stock market one year ago, & have it stand the test of time)!
Who will be right tomorrow about the discussions of today?
Only time will tell...
The above discussion posits clearly with my point that HM (Harmony) & NEM (Newmont) (Loeb discusses Newmont in his book “The Battle for Investment Survival”) were far superior investments, (even though the U.S. was in the grips of the worst Bear market in the 20th century) because of the above reasons.
2) Not sure what you mean…
>>of course this doesn't even delve into the government's intervention in gold markets back then which probably renders all comparisons to previous time periods useless!
From time immemorial Governments have always interfered in the gold markets. So what else is new?
>> there's no surplus. we are in as much debt as we have ever been
3) huh??? Care to back that up?
>>simply put the methodology behind his numbers are not detailed and the time periods he chose to label as deflation and inflation are suspect, thereby rendering his conclusion highly suspect as well. of course this doesn't even delve into the government's intervention in gold markets back then which probably renders all comparisons to previous time periods useless!
4) See my 1st point.
>>well how come when our financial markets were at the darkest point at the start of april
5) Do you think that April 4th was the bottom? You must be kidding. Things are going to get a hell’ve a lot worse than that. If anything, it is the proverbial slingshot across the bow, much like April 4 of last year when the NAZ dropped 600+ points intraday & then on April 14 (also last year) the Dow's wild intraday swing of 700+ point. Somehow that doesn't seem normal. Does it? Courtesy of AllansAlias geocities.com (volatility charts)
>> ok, if that's going to be true, why hasn't it been borne out this go around?
6) Excellent point! I wish I knew the answer ‘cause if I did … <g>
So here is my best guest on that very point…
Since it appears that we are entering or have entered a “Kondratieff Winter”, (or in a transitional phase from one to the other) deflation normally appears at this stage. So you are correct in your argument: when you suggest that:
>> ... my point is gold weakening further here is signaling deflation which of course will lead to massive bankruptcies, layoffs, unemployment, etc. i don't see how this makes your case for deflation being positive for gold.
My point was “The contraction part can be overcome by lowering short-term interest rates or cutting marginal income-tax rates and capital-gains taxation. The deflation part of the problem can only be rectified by having the Fed add sufficient liquidity to cause gold to climb back over $300. Otherwise, there will be an slow, grinding, downward adjustment of all dollar prices” Which is precisely one of the problems that we are facing now. The other of course, is the wild malinvestment in capital spending which is just coming to light (unlike of course the majority of fibre optic cable which may remain ‘dark’ for a considerable period of time
Of course the FED has run into a problem that is manifested by the strong US dollar. A strong dollar is deflationary in America (which is why it is keeping inflationary pressure down). As the US dollar rises, countries which export to the US can reduce the prices of their exports & still receive the same # of CDN $, yen, etc. Which of course, encourages even more imports, and increases the pressure of local or more properly stated, domestic producers to cut their prices. & so the cycle escalates…
Getting back to gold, the FED will probably try their damndest to try & reinflate the economy, by whatever means they have @ their disposal.
But it is just possible that the rate of inflation is now being underestimated, after a long period in which forecasts of inflation were too high. It is worth exploring what assumptions went wrong and why. & ...So an inflationary blip cannot be ruled out, especially in the US, where the six-monthly annualised rate of growth in broad money is at more than 15 per cent. A strong economic recovery might turn that into something worse. That looks at best possible rather than probable. But the inflation hawks will feed happily enough on a blip.
news.ft.com.
However, we have now run into the problem that historically government (& course well financed speculators) has participated in, whenever gold is suggested to be a monetary unit. This time it is probably bigger, more widespread than at any time in history (going back 5000 years or so). It is a market to quote Russwinter “ …” Gold is not a freely trading market right now. It is in severe disequilibrium, caused by a huge lean of paper shorts. It has little to do with big macro issues like deflation IMO. Unfortunately for the shorts (and producers), economic fundamentals are at work.”
The economics are apparent wherever you look,. However, the attempted cornering of the gold market by hedge funds, governments (ie: central bankers) & the explosive use of derivatives have painted a somewhat different picture then before. Whenever a market was “trapped”, or cornered, it has a tendency to blow up. For example the Hunt brothers attempt to “lock” the silver market.
"I think the posture of the market is very wrong-footed. The mining companies that have sold forward, the bullion dealers that may be short, all are going to be [holding] bad assets. Like when the yen carry trade went sour, the market is simply not liquid enough. When gold goes through various chart points, it's going to go through at $100, $200 clips, not a dollar a day. These guys are going to be trapped." (I can handle that... my juniors will go to the moon & miners like ABX & PDG etc will go to hell in a handbasket(dependant of course on their hedging arrangements... but they won't see the moonshot rise in prices that unhedged juniors will see who are leveraged to the POG<ggg>)
The Mother of All Short Squeezes
If gold prices ever ramp in a sustainable way, it will almost certainly be a boon for precious-metals stocks. But a sharp increase in gold prices would engender great pain to those short the metal, a group that is believed to include most hedge funds active in commodities, as well as bullion banks such as Morgan Stanley Dean Witter (MWD:NYSE), J.P. Morgan (JPM:NYSE), Deutsche Bank, Credit Suisse First Boston and, through affiliates, Citigroup (C:NYSE) and Goldman Sachs (GS:NYSE).
"Any slight move aside from normal organic buying and we think it's going to be one of the biggest short squeezes in the history of the market," says Ronny Kraft, CEO of Gotham Capital Management. "We're getting set up for something really disastrous. The fact people are totally oblivious is par for the course."
Kraft says "regression models" show a more than 80% correlation between the past 150 days and the market tops of 1929, 1987 and 1973. He believes a move in gold could trigger a massive selloff in equities as players short gold sell their stocks to cover those positions. "I'm not some crazy doomsday prophet," the hedge fund manager says earnestly. "I want to be a bull, but the charts are telling me I can't."
thestreet.com
In conclusion, it is possible that we are running into a simultaneous confluence of an inflation/deflation juggernaut, which will make the FEDs job that much more difficult. A Fed intent on pulling out all of the stops to reflate the economy. A Fed intent on ignoring the recent lesson of unintended consequences that was the doubling and collapse of the NASDAQ. A Fed forced to now navigate the waters between the Scylla and Charybdis of the deflationary asset retreat of stock prices and the inflationary action that is significant monetary accommodation. A Fed Chairman whose own words now describe inflation as able to be "contained". As you know, toxic waste spills are contained. Forest fires are contained. Accidental oil slicks caused by tankers hitting the rocks are contained. This is a Fed that appears intent on avoiding an economic collision with the letters U or L at all costs.>
The only claim that I can personally make, is that my gold stocks are vastly outperforming any other index or sector that I have participated on the long side since January 2001. And aside from minor adjustments in my Precious Metals portfolio, it is out performing my trading by a wide margin. (of course one can read that a number of ways… I must be one heck of a lousy trader LOL )Since Feb. or March, I have been almost totally invested in assorted Canadian junior gold stocks…some that trade on the NYSE & AMEX & the rest on the TSE ( except for HM I was happy for the pop up, with the take out by ABX, but was very disappointed by managements decision to sell out to ABX.)
Of course the usual WTFDIK & IMHO
Regards,
Peter
smartmoney.com |
