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Deflationary Economic Collapse Crushing Gold and Silver

Commodities / Gold and Silver 2011 Sep 27, 2011 - 01:47 AM GMT

By: Jason_Hamlin


Best Financial Markets Analysis ArticlePrecious metals are getting absolutely crushed, as investors are rushing for liquidity and selling anything in the green to cover losses in other assets. The market has good reason for concern. It is all but inevitable that Greece is going to default, a few major European banks will fail, and this will throw the entire world economy into a tailspin. The FED hasn’t helped the situation, announcing a very deflationary “Operation Twist,” rather than a new round of quantitative easing as the market was so desperately craving.

The move was reportedly intended to help the housing market by lowering mortgage rates and encourage businesses to start spending the cash they are hoarding, but investors reacted by selling off equities. The FED appears to be running out of bullets and the only true way that they could help the economy is to announce their dissolution.

Inflation vs. Deflation

It has been a while since I’ve commented on the inflation vs. deflation debate. It is a confusing thought to ponder, especially if your goal is to walk away on one side or the other. After all, intelligent minds argue forcefully on both sides. But I believe that we can have both inflation and deflation at the same time.

The massive amounts of stimulus and money printing over the past few years have been undeniably inflationary. There is significantly more fiat paper in existence today than there was in 2008. But the velocity of money has decreased significantly, meaning that cash is not flowing through the economy and exchanging hands at a very fast pace.

In addition, the larger portion of the overall money supply is credit, which has contracted sharply. Banks are not lending to individuals or businesses, while most of the new money created has benefited only a small segment of the population. This creates a scenario where there is some degree of monetary inflation, especially in cash-based markets, (food, energy, stocks, etc.) but very little inflation overall, particularly in credit-based markets such as housing.

With this massive credit contraction, lending has slowed, manufacturing has slowed, unemployment remains high and GDP growth is anemic at best. Economies can not grow when credit markets are frozen and this is the current state of economies across the globe. GDP growth has failed to keep up with debt growth and all of the toxic derivative creation has brought the world economic system to the breaking point.

I believe we will eventually have inflation or even hyperinflation in America, but we are currently in a deflationary dip that has yet to run its course. The final outcome is likely to be stagflation, a period with high inflation and low economic growth. Keynesians may be confused to see both occurring simultaneously, but the real issue is the how difficult stagflation is to overcome.

Why Gold and Silver are Collapsing

Gold is down more than $300 or roughly 16% in the past few weeks. Silver has lost nearly 40% in the same time period and the mining companies have also been hit hard. This decline in precious metals has been driven by funds scrambling for liquidity, the CME hiking margin rates and a stronger U.S. dollar. Many also suspect that the banks helped to manipulate the price lower in order to cover as many of their underwater short positions as possible. JPMorgan and their cohorts control the paper markets and can use their leverage to manipulate the spot price to whatever level they want in the short term. This is done via “stuffing” trades and using a variety of other methods to make the markets believe that there is considerably more selling pressure than actually exists. This is particularly profitable as options expiration is this week and the current smack down will leave most options expiring worthless, in addition to providing an opportunity to exit short positions.

But despite the apparent manipulation, JPMorgan has been woefully unsuccessful at suppressing the price in the long term. After all, gold is still up 25% and silver 40% in the past 12 months!

Parting Shot

Investors have to determine whether we are entering a new deflationary chapter that will result in a prolonged period of depressed prices for gold and silver, or whether this is another short-term correction and buying opportunity. While I am usually quick to view these dips as excellent buying opportunities, any number of events could push the global economic system over the edge. In such a scenario, investors will likely continue to dump precious metals and mining shares, throwing out the baby with the bathwater in a panic. But the monetary metals are likely to bounce back quickly and the downside risk at this point seems rather limited.

If the market does not fall apart quite yet and the Bernank decides to announce another massive stimulus, gold and silver are going to spike to new highs in no time. This is the scenario that most investors have been waiting for, although the electorate has lost their appetite for such bailouts and the political will has all but dried up. Still, more QE and bank bailouts will be necessary to avoid financial collapse in the short term, so my bet is that we will continue to see quantitative easing, even if it isn’t announced officially by such a name.

No matter how our central economic planners decide to deal with this ticking time bomb, I’d rather be holding gold and silver than any other asset class. They have been money for thousands of years, have held their purchasing power under a variety of adverse conditions and have proven to be an effective safe haven asset. Safety should be a growing priority for your investments these days. First Mayor Bloomberg predicted riots would hit the streets of America and now Geithner has hinted at the possibility of bank runs:

“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,” the Treasury chief said. “Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe.”

I suppose you could follow Buffett’s advice and be greedy now while others are fearful, but I’m not sure that old adage will prove profitable this time around. I am going to avoid most equities, opting only to hold quality miners at this point. And while cash might be king during uncertain times, the only form of money that I am holding is the precious type. If you have been waiting for an opportunity to buy precious metals and mining stocks on a dip, I think this will prove to be an excellent entry point. With the world aflame and protests finally spreading to America, this is a good time to get positioned and prepared for uncertain times ahead.

Bull Premium Membership. You will get the highly-rated monthly contrarian newsletter, real-time access to the model portfolio and email alerts whenever I am buying or selling. I also make myself available to premium members for questions via email.

By Jason Hamlin

Jason Hamlin is the founder of Gold Stock Bull and publishes a monthly contrarian newsletter that contains in-depth research into the markets with a focus on finding undervalued gold and silver mining companies. The Premium Membership includes the newsletter, real-time access to the model portfolio and email trade alerts whenever Jason is buying or selling. You can try it for just $35/month by clicking here.

Copyright © 2011 Gold Stock Bull - All Rights Reserved

All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The information on this site has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any information on this site without obtaining specific advice from their financial advisor. Past performance is no guarantee of future results.

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Matty in Florida
29 Sep 11, 06:40

Jason, your articles ROCK - and now you've just beaten me to a specific punch: A number of recent articles have prompted me to recall the passage from Forrest Gump, considering determinism vs randomness in the events of one's life, in which he concludes: "I think both is goin' on at the same time". Obviously - just as you point out - with the 'flations scenario this is precisely the case: some things are well and truly rising in price up while AT THE SAME TIME others are clearly going down. The very terms "inflation" and "deflation" - and the even more ridiculous "stagflation" - only ever have served to mask the recognition of wealth TRANSFER - a displacement, just like squeezing a balloon to move its bulge - from one economic domain to another. During "stag"-flation a wage-earner is not just resting "stagnant" - he is SINKING, and fast!

John F. Kennedy famously said of the economy that "A rising tide lifts all boats". Shortly after which these people not only killed him, in gruesome fashion for all to see, but then went on to (continue to) perfect the economic manipulation which lifts only a select few boats, by direct consequence and at the direct expense of all the others. And handing us bullshit names like "stagflation", by which we are supposed to "understand" it.

In point of fact, this is nothing more than vicious fat walruses climbing atop the raft, to shove it under. They need to be rolled over the side.

As for riots in America - as well as elsewhere - I don't think we need any of that, but simply to RESIST and DISOBEY. Stop fighting the wars. Stop (you police) beating your neighbors - for which Wisconsin just set you a great example. Don't swallow the lies and SPEAK THE TRUTH. And of course, hang onto your PMs - hell, they are still up, just as Jason said - but regardless it is imperative to NOT SUPPORT THE FED.

And then we'll see just who freaks out, and tries to benefit from inciting a riot.


-Matty in Florida

29 Sep 11, 09:53
Only Ripples of Deflation


As long as theres money printing then there will only be inflation, you need to zoom out of the charts.

Look at every trend over say 50 years and then tell me wheres the deflation. Its easy to pick a corrective deflationary trend against an inflationary mega-trend, but thats not going to make you money in the long-run.

Whats going to make you money and protect your wealth is looking for deviations agains the underlying inflation mega-trend.

Every asset that cannot be printed is being inflated as priced in fiat currency which is why the Dow today is at 11k today as opposed to 384 at the 1929 bull market peak. It has been INFLATED to near 30 times where it PEAKED before.

Again those that think that it could be deflation or inflation need to ZOOM OUT of the graphs they are looking at because they are mistakenly or on purpose ignoring the over-riding mega-trend that will eventually reassert itself.



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