Guest Post: Today's Gold Myth "Its Topped, There Is No Inflation, Get Out Now While You Still Can"

Tyler Durden's picture

Today's Gold Myth "Its Topped, There Is No Inflation, Get Out Now While You Still Can"

By Alex Stanczyk - Oct. 1st, 2010

About the Author: Alex Stanczyk serves as an Executive Vice President for the Anglo Far-East Bullion Co.

I am starting to hear this mantra parroted through 'internet rumor' that because there is no inflation, gold has hit its high, and you're better off selling now while you still can, and certainly not buying any.

To address why this view is unfounded, let's start off by taking a look at history:

"Prices in Germany temporarily stabilized and remained rock-steady during fifteen months in 1920 and 1921, and there was therefore no surface inflation at all, but at the same time the government began again to pump out deficit expenditure, business credit, and money at a renewed rate." -The Dying of Money, Jens O. Parsson 1974

These events preceded the hyperinflation of 1923 in Germany when the German Reichsmark plummeted in value versus gold to the point that an entire city block of commercial real estate in Berlin could be purchased for just 25 ounces of gold.
This entry sounds eerily familiar to today.

Clearly, a drop of inflation does not mean anything in terms of if it's safe or not safe to buy gold - rather it could actually be a precursor to a hyperinflationary event.

In 2008 the Federal Reserve pumped trillions of dollars into the US economy in order to prevent a deflationary depression - just one week ago Federal Reserve Chairman Ben Bernanke went on record indicating he was willing to pump in trillions more. The reason he is willing to do this is because he has no other choice - the fact that there is no inflation is actually far more ominous for the global economy than many realize - it means the first few rounds of paper printing didn't work. It means that if Bernanke pumps another two trillion dollars into the economy to prevent a deflationary collapse that it almost guarantees gold will continue to go up, not down.

This argument about "there is no inflation so don't buy gold" also assumes that gold's role is as an "anti-inflation trade" only, and does not take into consideration the primary reason gold is currently rising.

Simply put, gold is a currency. It is the ultimate currency against which all other currencies are measured.

The reason it is currently rising has nothing to do with gold being in a bubble, and everything to do with the fact that all paper currencies follow the same historic pattern, which is a pattern of debasement - when debasement reaches certain levels gold does not "go up" in price, currencies "go down" versus gold.

Gold is not acting in any way like a commodity that is non-correlated to inflation. It is in fact acting like a currency, and the counter-balance to what the world sees as an inevitable devaluation of the dollar as Bernanke once again turns the Quantitative Easing pumps (aka printing more money) on full blast. This massive debasement of the currency will be quickly followed by other nations, not because they want to, but because they have to.

According to Brazilian Finance Minister Guido Mantega, we are currently witnessing an "international currency war" - a war where countries continue to devalue their currencies against each other to improve their respective competitiveness in the global export market.
At AFE, we have spoken about this pattern for years, calling it the "Race to the Bottom".

I have used this example to illustrate:

Imagine a group of ships in the ocean, these ships represent the various currencies of the world. In the middle of this group is a ship, slightly bigger than the rest, that is currently the worlds reserve currency.

The funny thing about the saying "rats from a sinking ship" is that the rats instinctively know when a ship is going down, and flee from it.
So in today's economy, we are seeing the rats jumping ship, and swimming to another ship as the big one in the middle sinks.

The problem here is, when they arrive at another ship, they realize that the ship they are climbing onto is also sinking...in fact its Captain and crew are sinking it on purpose in order to compete with how fast the big ship in the middle is sinking.

Finally, as this pattern continues, the rats start to realize that none of the ships are safe, and instead start swimming over to a small island nearby, that isn't sinking at all. On this island as the rats arrive, they find a few very very smart rats who have been there for a while already, sitting under a nice shady umbrella and drinking iced refreshments. By the way, this island is made up of gold.

History shows that towards the end of a fiat currency's life cycle, there is massive volatility in markets and currency values - we are seeing exactly that today.

As each country continues to debase its currency, gold will continue to rise against all currencies.

In the words of former Federal Reserve Chairman Alan Greenspan speaking before the Council on Foreign Relations in September:

“Fiat money has no place to go but gold...If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.” - Alan Greenspan

Until some sanity is restored to our monetary system, the fact that gold is acting as a currency will continue in trend. People might be wise to start thinking of gold not in terms of its price rising, but rather that all of the paper monopoly money of the world is actually devaluing against the ultimate currency.

Kind regards,

Alex Stanczyk

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Hulk's picture

Sell Bitchez!

nmewn's picture

LOL.

"The problem here is, when they arrive at another ship, they realize that the ship they are climbing onto is also sinking"

If not for the courage of the fearless crew the Minnow will be lost!

Sigh...we can't get any bitchez to sell ;-)

Popo's picture

Other ships sinking?

Sell and buy oil.   If inflation alone were driving gold to all time highs, we would see it in oil.  If you believe inflation rules the day, it's a no lose trade.   If gold is rising on something else, buying oil is a flight to safety.  Either way it's the right trade.

Gold will go much, much higher -- That is certain.  But anyone who thinks there won't be massive crashes along the way is a neophyte goldbug.

 

 

 

morkov's picture

all oil claims/buys depend on US$ dominance...or are you expecting a smooth transition to another currency??, comrade... are you betting on the outcome from the coming war??

Hephasteus's picture

I want to sell but I can't find a buyer!!!!

rocker's picture

The U.S. Mint will buy. They ran out !!!  Got Silver !!!

breezer1's picture

get to an eye doctor immediately. 

Dr. Engali's picture

I need a bigger island.

TooBearish's picture

Yup - The CNBS commodities guru, Dennis Fartmen, of the Fartmen letter says gold is "overvalued" and also went short Crude oil 3 session ago before its 5$ tear.  The "experts" are ripping it....

Glaucus's picture

Where's the Mogambo Guru when you need him?

Oh there he is!

Hahahahahahahahahahahahahah!

nmewn's picture

Silver/gold ratio @ 59.6...what we need is a 20yr. chart on this...I have been unsuccessful finding one.

janchup's picture

Just do exactly the opposite of Fartman who has nearly a perfect record of being wrong on gold.

akak's picture

Yes, "nearly perfect".

Now, if you want absolute perfection in the being-wrong-on-gold arena, you need look no further than the good (sic) Jon Nadler, Kitco.com's resident gold permabear, permabullshitter and bankster shill extraordinaire.

Just a few items that you might like to peruse regarding this amazingly INaccurate, dishonest, dissembling and shrill spokesman for the gold-hating status quo and financial elites:

 

"The Nadler Retort: What Jon Nadler doesn't want you to know about gold":

http://www.tomaveni.com/Commentary/Nadler-01.htm

http://www.tomaveni.com/Commentary/Nadler-04.htm

http://www.tomaveni.com/Commentary/Nadler-05.htm

http://www.tomaveni.com/Commentary/Nadler-06.htm

 

"Kitco's Nadler Problem":

http://silverenthusiast.com/kitcos-n...-1/#comment-16


"What's Eating Jon Nadler?"
:

http://www.miningmaven.com/blog/51-b...ng-jon-nadler-


"The Idiocy of Jon Nadler, Gold Permabear"
:

http://forums.silverseek.com/showthread.php?8632-The-Idiocy-of-Jon-Nadle...

 

 

NOTW777's picture

well in case no one noticed it just ran from 1160 - 1320 in 2 mos.  didnt notice all these recent gold lovers a couple hundred points lower

"topped" is a relative term. 

 

johngaltfla's picture

I stand by my call: Top around $1350 (range was $1300-1350 in my book) maybe a little slop over intraday by 10-15%. Then we roll and hard.

The entire Financial sector stock complex is sending a message and those charts look like (to quote an oldie but goodie) smoking, hulking, rotting death.

I'm just sayin'.

hettygreen's picture

I enjoy following gold and the commentary it inspires but am a member of the prosaic gold as insurance, not to win the lottery camp. Someone I read and listen to on a regular basis (Bob Hoye) is calling for a modest technical correction in the metal (and shares) within a still growing bull market. Again this is based on what happened previously when gold and silver prices reached current RSI levels. What I found interesting was he could not rule out the possibility of a further manic run-up to RSI levels in the high 80s low 90s. This would be consistent (imho) with the Dollar collapse envisioned by many here and elsewhere. Unfortunately this action would in all likelihood signal the beginning of a new bear market in the PMs says Bob (and attendant Dollar moonshot says me). Gold enthusiasts and Dollar nay-sayers be careful what you wish for! And yes I very much agree with your observations on the Financial sector technicals (which few seem to be paying much attention to these days). Also the bond market action is suggesting an SPX "reconciliation" around 750.

mrgneiss's picture

Investors and traders who truly understand the Precious Metals market realize some truisms:

a) By holding physical gold/silver we are hedging against a deteriorating economic situation and/or sudden crisis, we hope it will not come to pass but it looks more and more inevitable, and merely look to protect wealth not reap a winfall by holding it

b) as a result of more of the global population realizing a), a bull market in precious metals ensues

c) there are various ways of reaping outsize gains from b) such as the extremely volatile - buying futures on margin, or the less volatile (less volatile in a PM bull market that is, otherwise extremely risky) investing in junior/small cap/explorers in the PM mining sector, though with c) if you believe in a) you must transition your profits from c) back into a) or other hard assets such as land

d) There will be no bear market in precious metals until the world has its economic house in order and somehow limits the ability of central banks to print infinite amounts of money, however that is accomplished

Xedus129's picture

I was thinking about that the other day, most of us essentially are making money (or keeping value) off of other people's ignorance as to the blight we are facing.

Shameful's picture

Yep the Fed is looking to be the #1 holder of US Treasury debt, food prices have a rocket on them, nations are getting into a competitive devaluation, no reason to buy gold here.  So long as houses are cheap and Apple products fall from the sky.  I'm sure most everyone buys homes and electronics far more then they buy food...

Freewheelin Franklin's picture

Funny you should mention food prices. I just noticed in the supermarkets, they switched the price/unit from lbs. to oz. A box of cereal I bought was $0.118/oz. WTF? I guess it makes it more difficult for people to realize how much they are actually paying. Thankfully, my cell phone has a calculator on it. Duh. 1 lb = 16 ozs.

Xedus129's picture

I was talking to this rodent exterminator who only works for them for the health insurance, and he works mainly on a farm in upstate NY.  He said, if milk were to be priced without controls it would be around $6.00 for a HALF GALLON.  Food prices are breaking the bank for many people apparently.. I notice it too but I'm also trying to lose weight so I spend less (actually about the same, or more healthy stuff is freaking expensive).

Midas's picture

I am disappointed.  I read this whole thing and no where did it state "you can't eat gold."  It's a drinking game...

enobittep's picture

Food, guns and gold - what are the similarities?

The federal government will have to pry each from our cold dead hands.

bigdumbnugly's picture

Finally, as this pattern continues, the rats start to realize that none of the ships are safe, and instead start swimming over to a small island nearby, that isn't sinking at all. On this island as the rats arrive, they find a few very very smart rats who have been there for a while already

 

substitute 'chicago' for 'island' and it isn't even allegorical.

Jaacyn71's picture

If the island is "green" is it "Al Gore" ical?

 

ANewUSA's picture

We've still got time to get out.

Limbaugh is hawking gold to the Alzheimer Republicans, that should be good for 3 - 6 months.

ruffian's picture

with all due respect Tyler, when I saw that greenspan quote in the NY Sun, I knew it would be of historic significance. Surprised that you didn't recognize it as such. Shows you are human after all and that's a compliment !!!

Millivanilli's picture

Asssssshoooooole.

Asssssssshoooooole

Asssssssssshoooooooole.

Get the point.   Speak to the idea.   Central bankers are devaluing their currencies.  Get it?!

RockyRacoon's picture

Let me add a junk to your rapidly accumulating pile.

...and a pile it surely is.

Bringin It's picture

Wow! An entire city block for 25 ounces!! 

Wait a minute ... is this Detroit?

Michael Victory's picture

East Coast Inflation Report:
Tonight at the grocery store in the Philadelphia suburbs...
Average price for a loaf of bread: $4 and change.

People talking about gold at all time highs..
"$1,300 vs. the old $800 time to get out."

So many, still unable to understand the paper game underway.
The size of which is incomparable to anything seen in the past.

~MV

THE 4th Quadrant's picture

"The size of which is incomparable to anything seen in the past."

That is a flat out lie. Do you have any idea what happened during The Great Depression? You must be a ZHill. Are you paid for each comment or hourly?

DebtBasedCurrency's picture

Yep, the ol' great depresion had goverment debts of 54 trillion world wide plus trillions more of unfunded liabilities. And for sure that ol' great depression had 600 trillion++ notational value of synthetic derivitives to settle also! so truly, this is much smaller than that ol' great depression.

RockyRacoon's picture

Junk!  And marked as such.  There.

JLee2027's picture

99 cents for a loaf of Blue Ribbon bread (On sale from 1.99) here in Maryland.

geminiRX's picture

That's a steal from where it will be in a few months....  

 

trav7777's picture

how fucking stupid are these writers?  Do they not look at production figures?

Gold has been in production decline since 2001, although the numbers out for 09 suggest a banner year if they are to be believed.  Are people conditioned to believe that gold cannot go up except for on account of inflation???

Fred Hayek's picture

But the silly corollary is that the same people all know that the consumer price index is a load of crap and that there's much more inflation than the official gov't lie admits.

merehuman's picture

but ascerbic, harsh, as time itself.

Blindweb's picture

Anyone who doesn't understand peak oil and peak various other planetary resources at this point is just embarassing.

THE 4th Quadrant's picture

Anyone who ignores how supply can be constrained in order to inflate prices is stupefyingly obvious.

tmosley's picture

People who change their usernames after being humiliated rather than just fucking off are annoying.

Fuck off, Johnny.

tamboo's picture

http://www.free-energy-info.co.uk/

see also:

http://www.rexresearch.com/1index.htm

oil is not made out of dinosaurs, get a clue.

http://www.greencar.com/articles/5-things-need-fischer-tropsch-process.php

look into wood gasification and clean diesel from coal, we only

have about 800 gigatons of coal on the planet.