The contrarian recommendation for gold since 2001 through today has been to buy. As capital was pumped into the economy via easy credit, the price of gold, stocks, real estate and most other assets rose significantly. The rise in prices is a causal effect of increased money supply and pulling forward spending via lax credit lending standards.
The inflationists argue, and rightly so, that this continued monetary expansion by the Federal Reserve will ultimately lead to the demise of the US dollar.
But there is another contrarian theory that has been proposed by thinkers like Mike Shedlock, Karl Denninger and economic forecaster Harry Dent – a deflationary collapse resulting from massive credit deleveraging.
Mish (Shedlock) argues that deflation is not actually the threat, because it is already here and there is a good reason it has not taken hold just yet:
October 5, 2009:
Deflation is not a threat because deflation is here by any practical measurement.
—
We are already in uncharted territory, and the risk is what the Fed, Congress, the Treasury department, the Administration, and central bankers globally do to prevent something that needs to happen: the liquidation of malinvestments and debt.
Thus the “real threat” (and risk) is not deflation, but rather the foolish attempts by Keynesian clowns to circumvent what needs happen.
But what exactly would a cleansing of the system mean for asset prices? If forecaster Harry Dent, author of The Great Depression Ahead, is projecting the deleveraging cycle accurately, then prices may very well fall off a cliff for all asset classes:
Via Dan Dorfman: Love Affair With Gold Turns Rocky
Clearly the most bearish outlook I’ve come across–one that the gold bugs would surely be quick to characterize as off the wall–is what I heard from an investment newsletter writer, Harry Dent, Jr., editor of the HS Dent Forecast in Tampa, Fla.
Taking note of $42 trillion in private debt, Dent expects half of that to disappear in a de-leveraging process within the next few years. That means, he says, the onset of deflation (falling prices), which will cause the dollar to go up and gold to go down.
Under such a projected scenario, Dent looks for gold to drop to $250 an ounce, a giant-sized slide that he expects will begin to kick off this year. “The fact of investment life,” he says, “is that the dollar is now going up and gold is now going down, meaning it’s time to sell gold.”
There are trillions of dollars in debt that need to be deleveraged within the system. Gloom Boom & Doom Report publisher Dr. Marc Faber argues that while deflation is possible in the near-term, the powers that be will do whatever it takes to avoid it, and in the end, will be successful:
If deflationists are right (and they could be right in the near term, in my opinion), then the US government bonds and the dollar will rally, while stocks, commodities, real estate, and lower-quality corporate bonds will tank. But if I am very confident about making one predicition, it is that, if we have further deflation in the immediate future, there will be not one more, but many more stimulus packages and further massive monetisation. So, government debt-to-GDP could easily double within five years. Now, does anyone seriously think that the dollar and government bond prices wouldn’t at some point begin to reflect concerns about the financial condition of the US under these conditions?
Marc Faber, Gloom Boom & Doom Report, August 2009
Whether or not The Federal Reserve can create enough money to offset the contraction within the system is the real question, and according to Harry Dent, there is a historical precedence to draw on:
“…history tells us clearly that once a massive deleveraging process starts, it continues and is impossible to stop—although it can be stalled, as has occurred here. Unemployment is a lagging indicator and is expected to continue rising in the early stages of the recovery. Thus, unemployment is the biggest threat to the developing recovery given the unique fragility of the banking system.”
Harry Dent, Economic Forecast, August 2009
An additional consideration to be made in regards to gold, separate from other assets, is gold’s standing as a monetary unit. During the late 1980’s and throughout the 1990’s, as monetary supply increased and prices in energy, food, and other sectors rose, the price of gold actually declined. Thus, gold does not always rise in response to inflationary pressure. Gold, argues Martin Armstrong, “is not the hedge against inflation but against the collapse in the confidence of government.” In this sense, gold can be described as the currency of last resort for individuals and governments.
Many economists compare today’s depression to the Great Depression of the 1930’s, and the name of the game then was deflation. In the 30’s we saw asset price deflation across the board, except, of course, in gold. Though it was a forced price increase through President Roosevelt’s confiscation and revaluation, it seems the government knew that the price of gold needed to be higher in order to offset all the leverage in the system. The free market certainly understood the value of gold, as capital shifted into the only legal way to own the metal en masse – stocks like Homestake Mining.
One discrepancy in comparing today’s economic conditions to that of the Great Depression is that we had a different monetary exchange system in the 1930’s with gold pegged directly to the dollar, as compared to today’s floating exchange currency system, so it is difficult to apply past depressionary models to today’s environment.
Another consideration to be made is that gold, being money and being de-pegged from the US Dollar, may lead it to retain more purchasing power vs. the dollar than other assets. And in essence, that is the ultimate goal of any gold investor. In the event of a deflationary collapse in US dollar prices of the value of a car, a house, a company stock, or another currency, gold may also decline, but the decline may not be as significant as other assets.
We would also like to suggest an alternate scenario called biflation and originally proposed by Dr. F. Osborne Brown in 2003:
Biflation is a state of the economy where the processes of inflation and deflation occur simultaneously.
During Biflation, there’s a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).
The price of all assets are based on the demand for them versus the volume of money in circulation to buy them.
With Biflation on the one hand, the economy is fueled by an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing, precious metals) remain in high demand, the price for them rises due to the increased volume of money chasing them. The increasing costs to purchase these essential assets is the price-inflationary arm of Biflation.
[emphasis added]
With our debt based system, biflation is sounding more and more like a plausible outcome in the future. Thus, the price of essential goods will be valued, in real terms (and nominal terms), at a higher price than non-essentials that are often purchased by pulling sales forward through the use of credit (i.e. – house, car, boat, furniture, high-end electronics, etc.)
With so much uncertainty in today’s economic environment, it is impossible to project exactly what will happen to the US dollar, gold or other asset prices, so positioning oneself for a variety of scenarios may be the most practical approach. In a depression, be it deflationary or inflationary, the most important goal in terms of investing is to preserve as much wealth as possible.
If gold does hold true to its historical role as a monetary unit of last resort during times of economic, political and social instability, then regardless of deflation or inflation, it may remain a powerful wealth preservation mechanism.
$250 gold? Great! I’ll buy all ya got!
There is a nagging problem I cannot get past when weighing the deflation vs. inflation debate. The problem is this:
If trillions upon trillions of debt is going to be vaporized in the coming years due to asset depreciation and default, then how does this translate into a reduction in the money supply if most of this debt is off the books? I keep hearing about the $600 trillion or $1.4 quadrillion world derivatives debt (depending on which number you believe), most of which is said to exist “off-balance” sheet. Doesn’t this imply that the gains on these investments, during the hey days, were also “off-balance” sheet? If so isn’t all this credit destruction deflation neutral? Please someone explain this.
WTF- Maybe BOB and Karl could have a pow-pow. The game changes on a daily basis. Maybe we should just buy lead and food.
I just remembered a great piece on the inflation /deflation topic at the link below. Â It’s written by Alfred Adask. Â I highly recommend his weekly newsletter, as well as his personal blog site.
specific article:
http://www.discountgoldandsilvertrading.net/20090809.doc
general page for weekly updates:
http://www.discountgoldandsilvertrading.net/Weekly_Market_Update.htm
Alfred’s personal blog site:
http://adask.wordpress.com/
I view owning gold as a security measure. I’m not speculating on its price. I raelly don’t care much about its fluctuations of price. I’ll buy it at $1100 and I’ll buy it at $250 a little at a time… with that said, i wouldn’t tell people to sell everything and buy gold. it has a place in your overall security, just like food and guns do.
For Chris C. –
To the extent that derivatives are initially a zero sum game solely between counterparties, you are correct. However when our Govt guarantees one side of such contracts (i.e. eats the losses), the effects are no longer merely between the original counterparties. I’m not endorsing the practice – merely stating what we already have seen.
 The broader issue discussed here is the credit bubble collapse. For discussion purposes, credit equals demand – demand for investment assets, demand for goods, demand for services. A credit bubble equals future demand pulled forward – the bigger the bubble, the further ahead demand has been pulled from. When the bubble bursts, demand collapses. With the collapse in demand comes a corresponding decline in prices.
In a theoretical free market, the value of an item is the last price paid for the item. In periods of deflationary spiral, the last price paid for something can be well below production or replacement cost. This scenario can persist indefinitely until an item in current surplus has been ‘absorbed’ by the marketplace. This can result in even bigger problems down the road as commercial production of an item so afflicted has likely been curtailed in the interim, unprofitable period.
For example, during the Great Depression the Federal Govt established agricultural production quotas and fixed prices to ensure a stable national food supply though the duration of the crisis. Otherwise, unpredictable distortions across supply & demand brought about by the crisis may have resulted in outright food shortages.
Consumers might benefit short term with lower prices. However, with ags for example, faced with shrinking or even negative margins, producers would scale back or cease production altogether until the prospect of a profit was reasonably anticpated. And as we’ve discussed here previously, people go hungry faster than a new crop can be planted, grown & harvested.
Hope this was helpful.
I bought some gold at $ 900.00 that looks ok for now but dollar cost averaging doesnt look so good at $ 250.00. How long would it take to come back to $ 900.00. And what did you loose on the way down. Sounds better on paper than reality. I am not one for long written comments, maybe some could explain to me the upside and likey turn around to rationalize anything good out of this sort of asset depreciation in a say 10 year window?    Â
I wouldn’t put too much stock in either of these men’s opinions.  Word is, the powers that be are trying to drive the price of gold down. Articles like this one, claiming $250, are just complicit in that movement…But please, $250? At least suggest something plausible to try and hook a few fish. Gold will NEVER be at those levels again…Take that to the bank…or to your safe.
That we are experiencing the greatest global credit collapse since the Great Depression is a fact. How it will be resolved remains conjecture.
Gluskin Scheff Chief Strategist David Rosenberg is comfortable projecting $2500/oz gold in a few years. He believes inflation will be the result of global government stimulus.
However during the only comparable modern example of a global credit collapse – the Great Depression – the US Govt banned private ownership of bullion. Government can & will do whatever they think necessary to maintain control. This gives me pause.
yourdaddy said “Word is, the powers that be are trying to drive the price of gold down.” All I have heard about is that China and India are significantly (on a percentage basis) ADDING to their sovereign gold holdings. My point here is, IMV China & India ARE the powers that be. Their growth stories have them holding massive dollar reserves. They are definitely not talking gold down.
The upshot is, if a true global deflationary spiral were to take hold, gold could go lower than $250/oz. While I personally believe most Governments will err on the side of inflation (i.e.gold @ $2500/oz), Germany’s deep cultural fear of hyperinflation could have them hold the rest of the EU at bay from their inflationary tendencies.
These are dynamic times and all possibilities should be kept in mind and not casually dismissed.
Paul,
If you think of your bullion as an insurance policy, it might makes the prospect of a declining asset value more palatable.
Holding bullion is a physical, mobile bet on inflation and at the extremes, a catastrophic loss policy on hyperinflation as your dollars become worthless.
It is a misnomer to think of gold as the next ‘reserve’ currency however. Not enough gold has ever been mined to supply the world’s currency needs.
Wow…and I thought I was bearish on gold.
Gold at $250? I doubt it, BUT not impossible. Think of this. Back in 1920 I put a $20 bill and a St Gaudens $20 .9675 troy ounce gold coin in my top dresser drawer. I got them out yesterday. Besides their possible collector value, what can each of them buy now?
Paper currency’s value CAN become ZERO. (Zimbabwe anyone?) but Gold will NEVER be Zero. So, are you hedging on this thought or are you investing/speculating that you will get more $$$ out of gold since you bought it? Now if you have Silver or Gold Eagles, spending them may be difficult too, even with LEGAL TENDER values assigned. But I would rather have THAT problem than have worthless paper on my hands.
One other note: Prices may deflate, but deflation can’t happen, right now in the U.S. There is a difference. Look up what deflation is. There are TOO many Federal Reserve Notes out there, inflation is a must. How much inflation is a different discussion.
The value of gold never changes. It’s the value of the dollar that changes. If $1100 gold drops to $250 gold it simply means that what $1100 bought, now $250 will buy ie: that $1100 suit is now priced at $250. Gold is like a bank. No FDIC necessary.
If I could put on an illuminati hat for just a moment, and wanted to come up with a diabolical plan to enrich myself while making everyone else poor, this is what I would do:
1. Drive the price of gold/silver down to historic lows, thereby pushing the value of the dollar WAY UP.
2. Use the increased value of my dollars to buy as much gold/silver as I can physically hold while everyone else is selling due to horrible deflation.
3. Crash the dollar and all world currencies, thereby giving me a several-fold increase in the value of my PMs, also knowing that most everybody was forced to sell these at depressed prices in step 2.
In this respect we have whipsaw deflation followed by immediate hyperinflation/currency collapse. Is this possible? I don’t know, but this is my master diabolical illuminati plan.
They can make gold $250 but you will never get physical metal at this price.. On black market gold will be $100.000.. But you can buy paper gold at $250 haha.. It is just impossible to manipulate physical metal.. you cannot print it.. You can print paper gold or manipulate stock market price but not physical.. There wont be any coins at the store at that price. They can make it illegal but then the price on black market will be many times more..  Â
Bheithir,
Banks are actually hoarding cash, unemployment is still rising, and real estate continues to be pressured by defaults. As a result, deflation is not just a possibility, it is by some metrics already occurring.
Lynn,
Gold is a commodity. While the price of a commodity priced in a particular currency is affected by the movement of that currency relative to other currencies, the value of a commodity is determined by supply & demand. Gold did not go up merely because the dollar went down a corresponding amount. Crude oil, which is priced globally in dollars, did not go from $35 to $147 and back to $35 because the dollar suffered an identical inverse gyration.
Chris,
It’s a complex & convoluted scheme to make Dr. Evil proud. However if I were looking to rob the nation’s wealth, I would merely become a TBTF Bank and securitize a bunch of garbage loans, then pay myself and my cronies a shitpot of money with a little left over for the Legislators and Govt flunkies I’d need to coerce…
i could not sleep at nite without a little by my bed, in the drawer next to my 45, they fit real well.
Comments…..
Hey Chris I think what you say is very possible. If we lose control in a deflationary spiral tremendous amounts of asset values will dissappear, especially the leveraged kind. It will also wipe out a lot of supply, economic activity as businesses go under etc.  But the govt. will continue spending and employing just like we see in Greece et al.  While tax receipts tank then what?
 US default? or currency collapse? maybe war with Iran?, more authoritianism and less anarchy I think we go that way for sure. There will be food, power, not much gas and for those that were able to somehow save their wealth they may be OK.  Cash, gold and personal skills are probably your best bets. A little food, some solid paper assets, guns and ammo wouldn’t hurt either. Â
TomOfTheNorth,
I respectfully disagree that gold is commodity. You can’t eat it or burn if for fuel and it has a limited commercial application compared to most other metals ie:silver. It’s not even a good investment because it earns no interest or pays dividends. However, it is what I call real money and it holds it’s relative value. Even in a SHTF senario, it may not be useful for barter with the other starving peasants but it will be useful in obtaining what you need from the Lord of the Land (that would be the prepared person with all the extra food or suits), try that with paper money or stock certificates, NOT.
What a ridiculous article, the idea that the central banks actually want to help nations with their debt by reducing the money supply? The REAL people behind the financial crisis know EXACTLY what they are doing and global regulation of banks and global governance is what they’re after.
What better than debt to hold as a leverage against all countries in the world? Nothing. Huge potential for land, business and government grabs. Oh wait, we’ve seen some of that already.
“Whether or not The Federal Reserve can create enough money to offset the contraction within the system is the real question, and according to Harry Dent, there is a historical precedence to draw on”
Nope, didn’t we all hear the announcement from China? Apparently the author didn’t. China put a cap on spending (printing of dollars).
I ‘could’ see a biflation-type scenario, however, one in which we see the Dow Jones decreasing (to 4000-6000) and gold price increasing, eventually the two will meet somewhere.
The value of gold is always related to what someone else will value it. I think of the ancient Romans in England as the empire collapsed. The gold these landowners possessed had no value as the ones who took over had no use for the gold. If the owners could have survived 4 or 5 generations then the value of the gold could have bought something.
In recent history look at the Jews in Germany. They turned their assets into gold and diamonds. Most of this wound up in the possession of their captors. The ones who survived and prospered were the ones that fled before the Holocaust began.
While owning a few ounces of gold could mean the difference between getting over the border, how is one going to transport it? when you flee with the clothes on your back and the only thing with value is your life, what is the value of gold?
This history of survivors over history has not been how many assets they carry but fleeing at the right time.
Money comes and goes. Assets gain and loose value, but you only get one life.
If gold is at $250. Â A loaf of bread is 5 cents.
Gold to $3,400 an ounce as the FRN kills itself.
Deflation is what is happeining. The U.S. Treasury is not printing money(monetizing the debt) but has 3 to 5  offers for every dollar of debt they offer. The big sucking sound you hear  is the all the dollars going into U.S. dollars and drying up all available credit,. The banks are holding 900 trillion dollars of bad debt that will wipe out all the major countries in the world. Stuff your mattress with U.S DOLLARS AND LIVE LIKE A KING. Gold will be the big loser as it goes form $1,000 an ounce back to $200 or less an ounce.  All the money in the World are flowing into U.S. dollars NOT Gold.  THE  GOLD PRICE HAS GONE UP MAYBE  100 DOLLARS IN THE LAST 18 MONTHS AS THE MEDIA WHORES TELL YOU BUY GOLD AND LOSE 80 TO 90% OF YOUR WEALTH..
gold ll never come to that 250$ path …to me it ll reach 1500$ dollar with in 2 years becoz lots of international demands nd supply ….with in 2014 it ll reach tat good holding position …by max
What people are buying right now is fools gold. You wouldn’t see people begging you to buy it on tv if it was anything other then that. You can’t eat, wear or live in gold. Nor will gold produce software, a car, or anything else you can use. All you can do is look at it. Strangely most people don’t even see the gold they are buying (that would be too risky). When average people need to exchange that gold in for real assets (because average people can’t hold gold for long periods of time) then the price will naturally go down.
“Average” people should not own gold. “Average” people, meaning those people of MEDIAN income or less, should own some silver as a store of value for a portion of their wealth. “Average” people should only own silver AFTER they have set aside sufficient provisions for the CHANGES. I recommend owning physical metal as there is no telling what happens to your ETF’s when the SHTF.
In the interim, before the TRIGGER, the price of Gold will continue to fluctuate between the resistance levels as traders take profit both long and short, with probably an upward biase due to enormous budget deficits by the USA, the printing of script, and the BK’s of Cities, States, and global Sovereigns.
When the TRIGGER hits, Gold will skyrocket as demand far outstrips supply. So if you can afford to buy some Gold do it but only after other items are in inventory. What is the TRIGGER?
1. It could just be an old fashion currency collapse that makes most everybody broke.
2. It could be the outbreak of war between Iran and Israel (Have you seen those drones Israel has that are the size of a 737, can reach Iran, and carry bunker busting bombs or warheads?).
3. It could be a meteor of sufficient size to create a serious a catastrophic scenario; understanding that late last year, early this year that kind of meteor passed by the Earth only 8,000 miles up, with only eight days of warning. Consider that communication satelites are 22,000 miles up and you get a sense that this was a close call, and it should be a real wake up call to the genuine possibility that this could really happen.
4. A Pole Reversal finally occurs after 750,000 years and remakes everything. The data that I have seen states that pole reversals occur, on “average” every 200,00 years. The Magnetic Pole has already shifted towards Russia.
5. So, $250 Gold? Not likely since China is the number one producer of Gold. You’ll see $250 Gold when oil is again $7.00 a barrel.
Is that true that Price Collapse to $250 an Ounce,interesting one really.
I keep hearing about the $600 trillion or $1.4 quadrillion world derivatives debt (depending on which number you believe), most of which is said to exist “off-balance†sheet. Doesn’t this imply that the gains on these investments, during the hey days, were also “off-balance†sheet? If so isn’t all this credit destruction deflation neutral? Please someone explain this.
Sweet. I’ll buy your gold then. Hurry up and sell it to me before its worthless. ROFLMAO! Waiting, retards.Â