Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Bugs, Curing the Addiction and Acquiring some Patience

Commodities / Gold and Silver 2010 Feb 22, 2010 - 11:10 AM GMT

By: J_Derek_Blain

Commodities

Best Financial Markets Analysis ArticleGold Bugs have a die-hard sense of expectation that is akin to waiting for the Toronto Maple Leafs to win the Stanley Cup (NHL championship).  It just bloody never seems to happen, and though you start the season with some sense of hope, you realize partway through that there’s no friggin’ way it’s going to happen this time.


And yet you cling to that hope, year after year, and before you know it, it’s been 43 years since sweet victory - and the last time there was one, peace and love, long hair and a widespread disdain for the invention commonly known as the razor were a widespread societal phenomena.

Now, gold did not win the Stanley Cup in 1967, nor can I recall it ever picking up a hockey stick in its multi-thousand-year use in human history.  However, it did win a championship, back in 1980 when it made an inflation-adjusted high (based on dec-2009 dollars) of $2,398.14.  Silver fared even better, with an inflation-adjusted-high of $250.00 per ounce.

Gold now sits down roughly 50% from that high, in real terms - its championship run.  And what a run!  That put gold a moon-shot and a half above its previous average purchasing power all the way back to the early 1700’s.  That massive spike in sentiment in which so many people ran to the metals is what many are counting on to propel the price to new nominal highs in the coming months.  I think we’ve covered what that psychology does to the eventual price of assets.

When you ask a gold bug how much gold should be today, you get as many different answers as there are gold bugs, with only one thing in common – “higher than it is today”.

One major mental note to make on this chart is that the price of gold was in a very long-term downtrend for well over 200 years.

This chart is measured in dollars and thus is also representative of a fixed (or relatively fixed) dollar supply, minus certain wartime eras of fiat money accounting for some of those smaller, near-vertical, post-fiat returns to gold.  So what you are actually looking at is essentially a long-term growth in productive capacity of the United States where industrial output and the volume of goods and services was increasing steadily per person.  Thus, money over time could buy more stuff, which is what happens when real money is used.

That wonderful blue box where prices seem to start going zany is about when the good ol’ Federal Reserve stepped into the batting cage to manage the most intrinsic part of any economy – its unit of exchange.

Two things have essentially happened since the Federal Reserve’s Frankenstein-creation in 1913 – the first is that the entire world has been absolutely flooded by US Dollars.  Trillions upon trillions of dollars are out there, all created via some form of debt and given “intrinsic” value by the fact that they are universally accepted and that they are legal tender (claimable in court).

The second is that the massive and continual flooding and increase in money has done what all long-term fractional reserve banking ventures do – they start lending to the good, capital-producing folks first.  Then, when those folks are borrowed up to the hilt, the FRB system turns its sites on individual consumers using mortgages and other forms of credit.  Finally, when the best of those are all lent up to the hilt, the quality of lender decreases again and again, until finally everyone with a first and last name, and being fully clothed, who appears in a bank is given a massive amount of credit-created fiat currency with which to do whatever their hearts desire.

But this process can only go on for so long.  Eventually, the smartest of these folks wise up to the debt burden and, against the wishes of all their “betters” (you know, the demigods in charge of managing the economy), begin to do something that very few of the living have even seen.

They begin to pay off their debt faster than they take out new debt.  The positive psychology towards debt turns negative very quickly.  It usually takes a loss of some kind, say in real estate and stocks, as in the Post-Roaring-20’s era.  People realize that using credit to speculate is dangerous, that paying interest and principal on something worth less than their credit bought for is like contractual slavery.  The first and most savvy of these folks start erasing their debt in earnest.

Meanwhile, the dead, who have lived through deflation before, shake their heads in pity for what is about to unfold.

Just as, on the way up, the rush is to take on as much credit and get into the stock game, or house game, or commercial property game, as soon as possible, the rush is to get the hell out as soon as you can before you’re holding the bag.

That rush has not yet truly begun.  It has been temporarily shimmied into a structure of seeming stability by those economic managers who think they have a chance in hell of stopping the rush.  They don’t.  When the collective market turns on them they will be swept away in the tsunami along with the crowd they are trying to trick into falling asleep.

Savings rates will be in the double digits again before this deflationary period is over, a most likely a lot higher than the 12% it was sitting at in 1982.   Household debt’s share of GDP will first skyrocket as economic output decreases (if you discount government spending, which just makes matters worse anyway, it has already skyrocketed), before falling rapidly to a level less than half of where it stands today.

Another reason the Gold Bugs will have to hold out just a little longer to break-even on their 1980 splurge in the PM’s, and that generation long wait for redemption.

People aren’t going to “flee” to gold and silver just yet – you can’t pay off debt in gold and silver, the banks won’t take it.  Try asking your employer to pay you in gold and silver coins instead of dollars – not happening.  And with today’s unemployment numbers the way they are, most people are willing to not only get paid in FRN’s, but far less than they were a few years ago.

No, Gold Bugs, there are still some major hurdles to be overcome before a real return to gold and silver can happen.  The catalyst, to this writer’s eyes, is going to be that point when about as much of that private debt has been paid off and written down, and those malinvestments reallocated, so the only ones left holding the bag are… guess who?

You know it – your friendly, neighborhood “I’m from the government, and I’m here to help!” collective body commonly known as the State.  When the majority is out there and free of the debt shackles, and the State is left with the bulk of the liability, that’s when the people should finally wake up and tell those folks to eat it.

In the meantime, psychology is still extremely elevated toward the metals as a capital gains asset - Psychology that should be unwound along with everything else, so the market can pick its money when the time is right. 
And if history tells us anything, there is a good bet that at least one of the PM’s will be waiting nearby to take up that role.

By J. Derek Blain

http://www.investophoria.com

© 2010 Copyright J. Derek Blain - 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 advisors.


© 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