Gold is often considered to be a hedge against inflation, and arguably, it has performed well during certain inflationary environments. In the late 1970’s and early 1980’s, for example, while prices for food and oil sky rocketed, gold saw highs that weren’t touched until just a couple of months ago, some thirty years later. But, as we have pointed out previously, gold doesn’t just rise during times of inflation, and in the case of the the 1990’s, gold remained fairly stable around the $300 price point for the entire decade, even though inflation continued to eat away at the purchasing power of US consumers.
It wasn’t until 2002 that we began to see gold rise again. Following the financial crisis of 2008, gold started a parabolic upswing that continues today.
This begs the question: If gold doesn’t necessarily rise during inflation, then what is driving it?
The answer is simple, really.
Just ask the people of Greece, who a year ago were willing to pay $1700 USD per ounce of gold while riots broke out all around them, even though the “open market” exchange price of gold was trading for $1100.
Or, we could ask the people of Belarus, who woke up to quite a surprise this morning:
Belarus has cut the official value of its currency against the dollar by 36%.
The dollar now buys 4,930 roubles at the official rate, up from 3,155 – but still well below the freely-traded interbank rate of about 7,000 roubles.
The country faces a severe financial crisis, thanks to a large trade deficit and rapidly falling hard currency reserves.
Gold (and hard assets like food) are the only protection for government instability. And, while price inflation can certainly be seen in goods other than gold, it is our view that inflation and hyperinflation of a country’s currency are nothing more than symptoms of bad policies and unstable government.
The US government and economy may not have yet completely collapsed, but it’s clear that those seeking to preserve their wealth and purchasing power aren’t taking our fiscal and monetary problems for granted. It is the fear and the loss in confidence of our government’s ability (and those of the rest of the world) to manage the financial crisis and stabilize the economy that is leading concerned individuals, investment firms and pension funds to seek safety in the precious metals that civilizations have turned to for centuries when the S hits the fan.
While the global economy is reportedly recovering and production and consumption is painted as returning to normal, the clear fact of the matter is that the world’s leading economies, namely the United States, are on the brink of disaster. The seriousness of the USA’s position was confirmed in a letter from Treasury Secretary Tim Geithner in January in which he suggested that if the US wasn’t provided more loans, the US would have to default on certain debts. As we breached the debt ceiling a couple of weeks ago, our Treasury Department gave us a preview of the implications of such a sovereign debt default when it raided government pension accounts to make payments.
In recent weeks there has been a lot of talk about how a US debt default might happen. While such a default is unlikely simply because the US has the printing press for the world’s reserve currency, a continued devaluation through monetary easing, or potentially an outright devaluation of the US dollar akin to what we saw in Belarus today are serious possibilities in the near future.
The Rules Governing a US “Credit Event” and Debt Default Contingency:
Discussion of a US debt default remained in the sphere of tin foil conspiracy for years. It is now at the forefront and being discussed by the mainstream media, albeit dismissively.
The reality is that we as a nation are in trouble and the only solution that the leading economic minds have been able to come up with is to increase spending (which forces us to borrow more money) and to print more money to cover any borrowing shortfalls.
Clearly, this is a recipe for disaster, and one which will lead to either an all out default on our debt, a Belarus-style devaluation (The US saw a similar devaluation of our currency under Roosevelt), or devaluation through protracted monetary easing over months and years.
All three cases result from an inability of the US government to manage its fiscal and monetary policies, as well as the financial crisis.
We know from history, that when governments lose the confidence of the people, there’s one asset that can be turned to in order to preserve wealth, purchasing power, and personal stability.
You can prepare for such a possibility now, or you can wait until the day after and end up scrambling for hard assets like thousands of people in Belarus today:
(Visitors look at empty shelves in a shop in Minsk, Belarus, Monday, May 23, 2011. Belarus is facing a severe downturn, with hard currency reserves plunging 20 percent in the first five months of the year to less than $4 billion, and staple foodstuffs vanishing from stores)
(People stand in a line to use an ATM in the Belarussian town of Grodno, some 260 km (161.55 miles) west of Minsk)
I’m legitimately scared here lately. The realization of just how far society can degrade is quite demoralizing. I have my AK, some silver and food; but what is any of that good for when life as you know it is turned upside down?
my wife dosent believe it can all go down in such a way but just look at what happened to the Argentines in 01 912( )=-133%?6 %?4114.
Timothy Geithner is one big ass lying troll about the U.S. economy.
The party is almost over.
A part of me refuse to believe that it can all hit rock bottom so quickly. Another part me is anticipating it as well, which keeps me more alert and on prep mode. Most of my friends and family don’t believe anything bad can happen here in the U.S. From what I can tell, there will be more slow pain and hurt coming once the Fed fires up that printing press again and you know Congress will raise that debt ceiling for sure. At this point, it almost seems as if nothing can collapse the system here in the U.S because of all the manipulation and funny money creation to keep the system intact by using duct tape, staples and some glue. Will it ever all come apart on its own, naturally? If so, its a matter of when and if there will be any other means of intervention to cause it such as a series of global natural disasters, etc…
Learn to prospect. Move to where the gold is located. You will never run out of money. There is an endless supply of gold for those willing to work for it:
If only for 4 hours a day.
You are right, DK. I prospect at the local dump and consistently find high grade ore – so concentrated it makes me wonder at my good fortune.
Often I find aluminum, iron, copper and steel. I prospect at night by the light of the moon so as not to disturb the locals who would claim jump me.
Be sure to wear leather chaps, otherwise the rats will bite through and infect you. Mine your local dump – it’s full of rich ores!
Nice going RafterMan and if you have time during the day you can dumpster dive at the local Post Office and find coupons and old junk mail to stuff your chaps with at night to keep you warm.
A friend of mine ran into someone who used to have a trash recycling company….apparently he was making millions and millions of dollars until the Feds came in and regulated him out of the market so he started trading currencies cause it was the only other market where he could make as much money as recycling trash…
The dedvaluation is worse than reported in this article (36%). It was actually 56%!
Good article. I do, however, take issue with the following statement from above: “we could ask the people of Belarus, who woke up to quite a surprise this morning[.]” The truth is that for the past 11 months the Belorussian government has been actively and publicly discussing devaluation of the Belorussian Ruble. Granted there was no date set for said devaluation, nor was there a “count down” to devaluation. Nevertheless, anyone who was paying attention knew this was coming; both Belorussians and those outside of the country. The devaluation was no surprise, just the timing. And that’s what I see as the key to prepping: we all know that the music will eventually stop. I think everyone knows that. It’s just that some chose to prepare because no one knows when it will stop, and others chose to just keep on dancing because they think the music will stop “later.” The truth is, the Belorussians, unless living under a rock, were not surprised by the devaluation. They were just surprised by the timing. I think this is an important distinction. A possible solution? Constant vigilance and preparedness. You never know when the inevitable will happen.
At the moment, the unofficial exchange rate depreciation of about 500% (I’m from Belarus)
Comments…..tim geitner does not know his ass from a hole in the ground!!!!!!
We’re focusing on the US but the worldwide economic instability can have an impact political, economic and unfortunately military for the US. The power brokers can start and somewhat direct “grassroots” revolts but often they can just take a direction on their own. Given some political alliances and US need for foreign resources the fruit is ripe for war. Not the managed wars contrived for political gain or control but real war.
If things get 1/2 as bad as many predict and you have health issues that require constant medication you have another problem that over time could be life threatening. Does anyone think that electricity would be reliable if the SHTF? Ugly, ugly, ugly.
From US industries leaving or returning to pay $7.50 / hr or literally trash picking third world style it don’t look good from any angle.
What happens when Greece defaults
By Andrew Lilico Economics Last updated: May 20th, 2011
It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.
What happens when Greece defaults. Here are a few things:
– Every bank in Greece will instantly go insolvent.
– The Greek government will nationalise every bank in Greece.
– The Greek government will forbid withdrawals from Greek banks.
– To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
– Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
– The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
– The Irish will, within a few days, walk away from the debts of its banking system.
– The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
– A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
– The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
– The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
– They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
– There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
– This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
– Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
– Attention will turn to the British banks. Then we shall see…
The reason gold didn’t rise in the 1990’s was the international banking system was selling gold to keep a lid on things. The price was being manipulated downwards to keep people from rushing into it and destabilizing the international debt ponzi scheme. The whole system begins to implode once people start rushing for the exits (gold)!
What is the best way to buy physical gold? Local coin dealer? What type of fraud do I need to look out for?
John, for Internet purchases I would recommend http://www.apmex.com . Also, kitco or gainesville coins. All three of these companies are reputable and well known on the Internet. For a more private purchase if paying cash, find a reputable coin dealer who has been in business for a while. You might also look to stick with recognizable gov mint issued coins like American gold eagles, Canadian maple leafs or south African krugerands, as they are more difficult to counterfeit because each coin has specific dimensions that cannot be duplicated unless real gold is used.
Another great place for gold and silver bullion and 90% silver and silver dollars is the
http://www.USGoldBuyingGroup.com I had really good service with them.
Never buy slabed/graded/proof coins John until you have “mucho” bullion coins. Only then will you fully understand the difference & likely hood of fraud, while new would be very slim.
Analysis right but remedy wrong.
Politicians are clever megalomaniacs. They know where people not quite stupid enough to keep their resources in fiat currency – dollars, pounds or euros – try to hide them. So be in no doubt. Your gold will be stolen by your government.
But the USA doesn’t behave that way!
No? It does, it has. In 1934 President Roosevelt – the sainted one, not the overt imperialist – forced Americans, on pain of heavy fines and imprisonment, to surrender their gold, then, before recompensing them in unbacked dollars, all but halved the paper-dollar price of gold.
And you’re still better trusting the yellow stuff than any politician of any party.
When you listen to the CNBC clip of Geithner above and you hear that “the size of our commitments to our citizens, in terms of pension and healthcare are much, much lower . . .” Well, I guess so considering they just began looting the pension funds.
This is a good piece and wake-up call. But preppers and doomsayers get some basic stuff wrong. They always imagine an overnight social breakdown scenario as the first outcome. Knowing politicians favour order and stability (and staying in charge), I can’t see that happening outside of a major natural disaster like what hit Japan.
Having lived through these events when I worked in Asia and post-communist countries, the tendency is to devalue in a stealthy way. To slowly unpick the previous wealth and hope nobody really notices until it is too late: the boil-the-frog approach.
Government and governing is a piece of theatre. You need to keep the set in place and all the actors on the stage (the police, civil servants, transport workers etc.). Now, the set can be made of corn flakes rather than wood and the actors could be turning tricks between performances to make ends meet, just so as long as the show goes on. I think that is how the US will play. In 10 years’ time, you will pinch yourself when you read a story on the web about a school principal turning tricks to pay the bills because pay is so bad, or how your favourite brand of hot dog just got caught being half full of saw dust. Little things like that will wake you up to what happened and how life changed.
4 hours? Not with hand powered you don’t. Maybe survive with 16 hour days. Been there done that in Oregon and Alaska.
You betcha. The real problem was the people didn’t think it would happen. They believed in the omnipotency of government to solve a problem the government supported and aided in the creation of. In the photos, we only see the few who are just now getting it. Wait a couple, three more days when the obvious finally starts to sink in.
If you always do what you always did, you’ll always get what you always got. Dr Phil
“Those who do not learn from history are doomed to repeat it.”
— George Santayana
“How fortunate for governments that the people they administer don’t think”
One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the Bamboozle. We’re no longer interested in finding out the truth. The Bamboozle has captured us. It is simply too painful to acknowledge – even to ourselves – that we’ve been so credulous.”
Sell in May and walk away is not happening.
All the U.S. needs to do, is begin printing U.S. Notes, via the U.S. Treasury, and cut the Rothschild-owned Goldman Sucks’ (so-called) ‘Fed’eral ‘Reserve’ Bank out of the picture, entirely. No need, whatsoever, for a return to a gold standard – since, only the very rich own gold, and would simply re-gain control over any new (post-US Dollar) (global?) currency. Also, the reason why silver will become viewed as REAL money (again), is because 99.9999% of the world’s population are POOR. They can afford silver – but, very few can afford gold. Silver is also far more scarce than gold. The smart money is in SILVER (physical silver).
More reasons why EVERYONE, around the world, should own physical silver:
The Silver Bullet and the Silver Shield
I’m a Crazy Silver Bug…Why Aren’t You?
Crash JP Morgan – Buy Silver (Keiser Report, Episode #96)
If anyone reading this page hasn’t seen it yet – you MUST watch this:
THE SECRET OF OZ
THE MONEY MASTERS
Anonymous on May 24th, 2011 at 9:22 pm said, “All the U.S. needs to do, is begin printing U.S. Notes,… No need, whatsoever, for a return to a gold standard…”
You’re kidding, right? Otherwise – wow – do you ever need to know more about sound money, here is a good first baby step:
The Social Imperative of Sound Money
“In a free market with sound money, borrowing is connected with the ability to pay. At first, this is only available to the rich. As prosperity spreads, so does credit worthiness. Any government intervention designed to inject steroids in this process is going to end in what Rothbard called a cluster of errors… [a cluster, get it?]
The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles…”
For you Manos. Read comments.
by Mr. Jim Sinclair, jsmineset.com 28 May 2011
Long speculated upon in our community, the rock and the hard place has finally become a reality. An economy not accelerating at an accelerating rate is declining at an accelerating rate. The mirage of a recovery is getting harder and harder to MOPE about. It simply is not there. We are entering a declining phase that will not end in any kind of a soft landing.
Stimulation monetarily, QE, and fiscal are like controlled substances in that the real high is on the first injection. After that, each additional stimulation of an economy must be multiples of the first stimulation in ever increasing size just in order to hold the line. QE3 is guaranteed unless the powers that be want to see a depression that will make the Great Depression look like kindergarten in the pain department.
This week we saw a European Bank forced to sell their US mortgage derivatives and the loss was a shocker. These pieces of crap are not worth the digital bits they are written on. Smart money has not let this event pass their view, and know now how broke the US financial system really is. This event broke the camouflage of FASB’s selling their souls out to politics by allowing the banks to value their mortgage derivatives at any price the bank wanted on the bank’s cartoon balance sheets. The western balance sheets of their financial institutions are raging misstatements. The system is broke. This is why there is no recovery of merit but rather a statistical aberration, which was until recently only holding the line.
Here we are at that place we have anticipated for the past 45 years knowing that all the games being played had to play out at that point where super stimulation had no effect and it became totally appreciated that even many trillions of printed money will only impact the currency and not business.
The rock and the hard place is a time when the Western World is simply screwed.
The risk of not stimulating is stagflation at a spiritual level. The risk of stimulating is stagflation at a spiritual level. The risk of doing nothing is both an economic and currency collapse of biblical proportions.
This is what the three illustrations of the skier teach. Should the Fed lose control of this, which is predictable, then currency induced cost push inflation would take gold to Martin Armstrong’s $12,500.
The odds are 70/30 right now that hyperinflation occurs. That takes gold over $1650. If the odds shift then gold starts a run to balance the International Balance Sheet of the USA and will secure Martin Armstrong’s target of $12,500.
How bad is bad… And he wants us go out shopping during bad… That’s right, give up your gold so “they can own it all for paper”. I’ve seen bad.
.why dont you Americans just get rid of Geit and Bernanke once and for all, they are wringing every last goddamned drop of blood from your country while you just sit watching football. Wake the fuck up and throw the facking FED out of your country, Its your only chance.
The FED has NOTHING to do with your government, its a foreign entity. Its job is to suck everything dry and leave the dust for the wind to blow away. Dont say you werent warned. Good Luck, God Bless America
Briaqn, some of us already know this. I don’t know where you live, but unless it’s Iran, Sudan, Libya, North Korea or Cuba, you are in the same boat because you have a Rothschild-controlled central bank running your country as well. How easy is it to get rid of the central bank running your country?
The best we can do is prepare for ourselves. It’s about survival now. Someone further up the page posted “I have my AK, some silver and food; but what is any of that good for when life as you know it is turned upside down?” Considering most people have their head in the sand, you are doing well. What is it good for? To help you survive, that’s what. The majority of people don’t even have what you have, so you are on the right track.