Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold: What Goes Up, Goes Down

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

By: Andrew_McKillop

Commodities

DR. GREENSPAN'S LEGACY
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.

DEVALUATION
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.

INFLATION
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.

JUNK BONDS AND GOLD
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

Contact: xtran9@gmail.com

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.

Andrew McKillop Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules