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Gold: What Goes Up, Goes Down

Commodities / Gold and Silver 2013 Feb 17, 2013 - 05:26 PM GMT

By: Andrew_McKillop


Alan Greenspan is very far from being ashamed, lying low and offering No Comment - he is a great man, he thinks, and some leading mainstream media editorialists also think. Commenting his track record from the standpoint of money in circulation, the gold price, and gold mining company stock, with a look at previous outbreaks of the situation we have today,  Mark J. Lundeen said:

"History shows that the consequences of monetary inflation can be delayed for decades. This favors the "policy makers", as it is difficult to associate economic consequences with their inflationary actions taken years or decades before. For instance, Doctor Greenspan inflated stock valuations to a point where the DJIA yielded only 1.3%. That was over 10 years ago, and we will be suffering the consequences of his bubble market for years to come. But few link Greenspan's inflationary actions to our current economic consequences".

Source: Mark J Lundeen

One key difference of today's outlook with the period of approximately 1965-1988, during which gold mining stocks "defied gravity", is that inflation was real during several periods in those days. It is not today. Greenspan's trick was to inflate stock values, and separate the paper wealth sphere from the real economy. In brief, Greenspan worked hard to create the traditional 24/7 trading-gambling saloon of previous booms, strictly reserved for the right customers, or players who know and respect the rules.The difference between this "management strategy" and the run up to, and sequels of the 1929 crash are very clear. This might explain why some leading editorialists still treat Greenspan as a great man. US stock price inflation ran out of hand in the 1920s - not since.

More complex, possibly unanticipated and therefore not planned or managed, extreme high monetary inflation can finds its perfect counterpart, or nemesis in relatively strong and increasing deflation of the real economy. This is likely what we have today.

After World war II, by the 1950s inflation "reared its head" after the phase of fast postwar economic growth driven by rising demand - and by a number of major technological improvements. Consumer prices in the US and several other OECD countries started growing, with the predictable round of "expert opinion" blaming this on "excessive demand" (its growth was already slowing), on resource and energy depletion (but not yet environmental pollution), and of course the media friendly explanation, blaming the inflation on The Soviets, was also on offer.

Just like today, most academics preferred not, or even refused to identify monetary devaluation as the primary cause. For various reasons, even ideological they refuse to admit that monetary inflation - printing more money - produces monetary devaluation, that is declining purchasing power and this will intensify if the economy is stagnant or slowing. By at latest the mid-1950s, inherent currency instability was at work again, with its highly traditional counterpart of trade war or mercantilist lunges and parrying, between what would soon become a much larger number of countries than in previous outbreaks of this struggle.

Those who still hold fast and true to gold, and-or gold mining stocks as an "investor opportunity", are forced to claim that monetary devaluation is finally less powerful than the effect of money printing, and despite the clear evidence of reduced circulation or velocity of money movement in the economy. They also need to claim that when the paper stock pile outside gold mine shares deflate, the outflow from the major indices like the DJIA will go to gold mining stocks and shres.

This is for the least uncertain.

Real stock decline from 2000, since the "ultimate bull run for stocks" of 1982-2000, is measurable by several gauges but above all any claims for continued growth of stock value depend on unreal (that is lying) claims about the CPI and the real buying power of major currencies, such as the USD. The CPI, in turn, no longer measures price inflation, but monetary deflation or devaluation. 

In fine there is no difference between these two terms, the first being spontaneous and the other being policy willed or decided. Devaluation is however the better term because, above all, this predictable crisis is willed and was decided by persons such as "Doctor" Greenspan. They may well have been acting "in good faith". Thy believed in productivity growth, the computer and Internet "revolution", solar energy, the climate crisis and other Good Things. Above all, in reality, they believed in Chinese industrial expansion - but not Chinese mercantilism - and this required rock solid belief in expansion.

Only growth was permitted. The trap was set.

The economy of the past four years since the 2008 crisis has puzzled official experts and policy makers in many ways, but the greatest mystery has been low and recently declining inflation. That may not seem at all remarkable in a stagnant economy, except that all the major governing elite-friendly economic theories suggest that prices should be rising at a fast clip. Flat or declining prices are like the silent dog that didn’t bark –  providing the crucial clue for Sherlock Holmes in 'Silver Blaze', proving there was nothing and nobody there to make the dog bark. Inflation theories of today, we can say have plenty of academic and media bark but no real economy bite. The current absence of significant inflation provides a tipoff to what is really happening.

At a starkly simple level, there is more money around than things to buy, so there should be inflation. This is one of the most classic explanations of why there is inflation, but totally ignores other extreme in play, over and above the extremes of money printing by central banks with the sometimes naked explanation that the persons who decide this want to see inflation return because "when there is inflation, the economy is still alive". For them, inflation = expansion.

We all know there are extreme government spending deficits and sovereign debt to "service", needing extreme low interest rates designed to expand the money in circulation and signalling that central banks are making it easier and cheaper for private banks to borrow. Debt "servicing' is through so-called quantitative easing – i.e. buying government bonds and creating additional money out of nothing.

The "expect to see inflation" prayer wheel continues with the admission that the financial sector shot it itself in both feet with an automatic rifle, not a tap with a hammer in 2008, resulting in banks "holding back on lending" as they recapitalize with government handouts. Inflation defenders also admit that consumers are over-indebted and are trying to pay down debt, instead of borrowing more.  Depressed housing prices have not only slowed the turnover of real estate, but also removed one of the cheapest ways of borrowing – home-equity loans. Finally, although companies are in some cases piling up huge cash hoards, their often stagnant or declining markets mean they have no reason to spend aggressively on expansion and new ventures. Above all, inflation defenders tell us inflation is "in abeyance" because consumer demand is depressed and the financial and political outlook remains so uncertain.

Pleading for more time before inflation can return and do great things for the economy - that is stock, gold and commodity speculators - inflation defenders wind up with the shaky argument that policymakers can put more money into circulation, "but they can’t actually make it circulate". They rarely talk about reality "down on the ground": people are scared - and they rein in their spending and save when they are scared.

The ultimate junk bonds are national sovereign debt instruments. Central banks around the world have maintained near-zero short-term interest rates for many years now. Several, including the US Federal Reserve have gone so far as to buy up hundreds of billions of dollars worth of government debt and mortgage-backed real estate bonds and hold them on their balance sheet, using this in the "strategy" of holding down long term interest rates, as well as short term rates. Theoretically, this alone should be a buy signal for gold, or at least gold mining stocks, but ignores the impact of this debt craziness on national currency values and the economy.

Deflating the purchasing power of major moneys by the real rate of monetary devaluation in play, today, heavily corrects the apparent high price of gold - even after it took its recent $300-per-ounce hit from its 2011 highs!

To be sure and certain, the pygmy-sized payouts of government bonds for prime borrower countries make yields on PIIGS country debt, and corporate junk bonds paying "as much as 4% a year"  look like a great deal, but even here the herd effect is major. Even junk bond yields are falling, because there is too much money chasing after them.

What we find is that very low interest rates on government debt, and even PIIGS debt, above all reflect the weak economy and the penalization, even spoliation of savers. To a certain extent this "should be inflationary", which if it was the case would favour gold, but this always completely ignores the cart and horse problem. To get inflation, you first need a growing economy; if you have inflation in a very weak economy, you really are in trouble, and any return of inflation will further depress growth.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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