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Deflation Comes Knocking On The Door

Tyler Durden's picture




 

Submitted by Alasdair Macleod via GoldMoney.com,

There is little doubt that deflationary risks have increased in recent weeks, if only because the dollar has risen sharply against other currencies.

Understanding what this risk actually is, as opposed to what the talking heads say it is, will be central to financial survival, particularly for those with an interest in precious metals.
The economic establishment associates deflation, or falling prices, with lack of demand. From this it follows that if it is allowed to continue, deflation will lead to business failures and ultimately bank insolvencies due to contraction of bank credit. Therefore, the reasoning goes, demand and consumer confidence must be stimulated to ensure this doesn't happen.

We must bear this in mind when we judge the response to current events. For the moment, we have signs that must be worrying the central banks: the Japanese economy is imploding despite aggressive monetary stimulation, and the Eurozone shows the same developing symptoms. The UK is heavily dependent on trade with the Eurozone and there is a feeling its strong performance is cooling. The chart below shows how all this has translated into their respective currencies since August.

 

Major CCYs vs USD 07112014

Particularly alarming has been the slide in these currencies since mid-October, with the yen falling especially heavily. Given the anticipated effect on US price inflation, we can be sure that if these major currencies weaken further the Fed will act.

Central to understanding the scale of the problem is grasping the enormity of the capital flows involved. The illustration below shows the relationship between non-USD currencies and the USD itself.

 

Total World Money 07112014

The relationship between the dollar's monetary base and global broad money is leverage of over forty times. As Japan and the Eurozone face a deepening recession, capital flows will naturally reverse back into the dollar, which is what appears to be happening today. Economists, who are still expecting economic growth for the US, appear to have been slow to recognise the wider implications for the US economy and the dollar itself.

The Fed, bearing the burden of responsibility for the world's reserve currency, will be under pressure to ease the situation by weakening the dollar. So far, the Fed's debasement of the dollar appears to have been remarkably unsuccessful at the consumer price level, which may encourage it to act more aggressively. But it better be careful: this is not a matter susceptible to fine-tuning.

For the moment capital markets appear to be adapting to deflation piece-meal. Analysts are revising their growth expectations lower for Japan, the Eurozone and China, and suggesting we sell commodities. They have yet to apply the logic to equities and assess the effect on government finances: when they do we can expect government bond yields to rise and equities to fall.

The fall in the gold price is equally detached from economic reality. While it is superficially easy to link a strong dollar to a weak gold price, this line of argument ignores the inevitable systemic and currency risks that arise from an economic slump. The apparent mispricing of gold, equities, bonds and even currencies indicate they are all are ripe for a simultaneous correction, driven by what the economic establishment terms deflation, but more correctly is termed a slump.

 

 

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Mon, 11/10/2014 - 17:47 | 5433968 dbTX
dbTX's picture

P M's are on sale.

Mon, 11/10/2014 - 18:02 | 5434017 LawsofPhysics
LawsofPhysics's picture

Bingo.  As someone in a business that involves significant real inputs, I will never complain about an increase in my purchasing power...

or, cheap diesel, or PMs on sale...

Mon, 11/10/2014 - 21:18 | 5434792 Save_America1st
Save_America1st's picture

youbetchya!  I'm lovin' me this deflationary spiral in phyzz.  Keep it coming you scumbags...us stackers will gladly take more phyzz off the market for less of our worth-less FRN's.

At the same time our avg. cost per ounce has plummeted!  Thanks again, bitchez!  You criminal cartel types are doing us all a huge favor so we can stack more and more phyzz before you kill the dollar.

Mon, 11/10/2014 - 17:48 | 5433969 justmy2cents
justmy2cents's picture

I can confirm in UK outside of London property, and wages are down big time since 2007.

Inflation - not here. Don't believe any statistics.

Mon, 11/10/2014 - 17:52 | 5433979 Spungo
Spungo's picture

Who cares about gold? The best hedge against inflation is owning a business. That means oil companies, pipeline companies, name brands like Hershey and Coke, Procter and Gamble, etc. 

I'm really psyched for this crash. I can buy productive assets on the cheap!

Mon, 11/10/2014 - 18:03 | 5434020 LawsofPhysics
LawsofPhysics's picture

Yes, and all those assets are currently at all time highs...  oh goodie...

Mon, 11/10/2014 - 19:23 | 5434391 Tall Tom
Tall Tom's picture

Yeah. It is great. I get the opportunity to pay more...for even less.

 

I am so happy about that. Those hawkers of Stawks need those Dollars. We need to give the brokers a welfare check by giving them larger amounts as the percentages remain constant. And what about bonuses? They have children you know. They might have to go without at Christmas.

 

Think about..the...children.  

 

They cannot afford their lifestyle in the Hamptons if we do not. They'd be evicted when they could not make their Mortgage Payment. Their homes would be...repossessed.  They'd be...homeless. You would not want to kick out one of those deserving souls out onto the street. May God forbid.

 

We need to pay more for less and do our best to support these people as they do such an invaluable service...as fucking the Middle Class over.

 

Who else would do our dirty work in gutting America for us?

 

Hugs

 

The Oligarchs

Mon, 11/10/2014 - 18:09 | 5434038 Brutlstrudl
Brutlstrudl's picture

 No one knows how this end game will play out.Be careful what you wish for.  

Mon, 11/10/2014 - 19:01 | 5434282 Silky Johnson
Silky Johnson's picture

I have a good idea, it'll involve pitchforks and assholes in one way or another.

Mon, 11/10/2014 - 18:57 | 5434262 Veneco
Veneco's picture

But those assets are very overvalued not whilst pms and mining shares sre not

Mon, 11/10/2014 - 17:53 | 5433984 cnmcdee
cnmcdee's picture

Futures Market Gold $1200   Real Physical $1400

The disconnect has already started.

Futures paper is leveraged 50:1 over physical.

It's a house of cards.  Gold's real value is about $3000 and it will go there

Mon, 11/10/2014 - 18:13 | 5434057 FlacoGee
FlacoGee's picture

https://online.kitco.com/buy/gold-silver.html

"Real" physical can be purchased for $1187 each.

Today.  All you can take.  

Buy now before the price is reduced futher!

If you are referring to your local dealer who tells you that it is tight supply...  then $1400 is probably correct.

1 oz Gold Royal Canadian Mint Bar
Product details
USD $ 1,187.40 ea.

Mon, 11/10/2014 - 18:26 | 5434100 Bay of Pigs
Bay of Pigs's picture

I tried to buy silver from Kitco once. They wanted hundreds of dollars to ship and insure it. I laughed and hung up.

Mon, 11/10/2014 - 18:39 | 5434179 zerozulu
zerozulu's picture

Price is when you can buy it and have it in your hand.

Mon, 11/10/2014 - 18:16 | 5434066 Beam Me Up Scotty
Beam Me Up Scotty's picture

Apmex selling physical gold eagles for about $1200.  I have some I will sell you for $1400 though.

Mon, 11/10/2014 - 21:43 | 5434873 bshirley1968
bshirley1968's picture

I am calling bs on that

Mon, 11/10/2014 - 21:45 | 5434876 knukles
knukles's picture

OK.
Then I'll sell ya' some for $5,000.

Mon, 11/10/2014 - 18:18 | 5434071 FlacoGee
FlacoGee's picture

Who defines "real value".

Bankrupt miners?   Local coin dealers?

All in cost is averaging $800 on most mines and that is bankrupt miners who don't know how to run a company.   Barrick is so loaded down with debt because of horrible decisions and their AIC is still at around $850 on all of their mines.

It will go to the All In Cost soon enough and much lower.

Also keep in mind that the cost of mining will decrease as the cost of diesel drops... 

Gold is going to fair value...  $500

Mon, 11/10/2014 - 18:56 | 5434237 BringOnTheAsteroid
BringOnTheAsteroid's picture

Sure it won't stop at $501.67, I think you are being pessimistic.

Buddy, if you could trust humans beings with fiat, running business, politics without a primary concern for themselves then there would be no use for gold other than jewellry. If you think the fair value of gold is $500.00 then Iwhat's your fair value for the S&P, 400?

Mon, 11/10/2014 - 19:21 | 5434380 lordylord
lordylord's picture

"Gold is going to fair value...  $500"

Future value of gold = anyone's guess.

Future value of the dollar = toilet paper.

Mon, 11/10/2014 - 19:29 | 5434412 Gold is money -...
Gold is money - and bullets if your out of lead's picture

Gold @ $500 and Diesel dropping long enough to make a difference??? What planet are you on?

Mon, 11/10/2014 - 20:40 | 5434657 CoolClo
CoolClo's picture

After $200-$350 bounce, which could start very soon, Gold could then turn down again and visit $681...

Mon, 11/10/2014 - 17:54 | 5433986 Ghordius
Ghordius's picture

I'm not sure I get the hint from the article?

Mon, 11/10/2014 - 17:59 | 5434007 Rainman
Rainman's picture

you are not alone

Mon, 11/10/2014 - 19:56 | 5434517 SAT 800
SAT 800's picture

It's mindless babbling. Some moron t alking his book.

Mon, 11/10/2014 - 20:18 | 5434600 Urban Redneck
Urban Redneck's picture

People can say the dumbest things...

"The economic establishment associates deflation, or falling prices, with lack of demand"

Mon, 11/10/2014 - 17:54 | 5433991 buzzsaw99
buzzsaw99's picture

what the fudge was that?

Mon, 11/10/2014 - 17:54 | 5433994 cnmcdee
cnmcdee's picture

Everyone is watching deflation but you have to realize one very very very important fact :

 - Futures Gold is NOT Physical.  It is leveraged 50:1  Once it fully disconnects gold (physical) will balloon.  The spread between them is already $200 / ounce.

 - Gold is the ONLY thing that is immune to depreciating currencies.  It will goto $3000 / ounce while asset prices that are not independent of a currency collapse.

It will be proven in the end to be the wisest investment in a lifetime.

Mon, 11/10/2014 - 18:04 | 5434030 A82EBA
A82EBA's picture

APMEX bid is currently $4 above spot, how often does that happen?

 

Mon, 11/10/2014 - 18:25 | 5434102 FlacoGee
FlacoGee's picture

Sounds like tight supply :)

Clearly the spread between "paper" and "physical" should be $1000.

Damn "paper".

 

Mon, 11/10/2014 - 19:05 | 5434306 lickspitler
lickspitler's picture

Gold sucks. One day, but not today.

Mon, 11/10/2014 - 17:59 | 5434010 ebworthen
ebworthen's picture

U.S. is the fattest pig in the slaughter house.

Keep eating that corn, Bessie.

Mon, 11/10/2014 - 18:01 | 5434016 tribune
tribune's picture

if gold is a good barometer of inflation when prices are rising, then it must be a good barometer of deflation when prices are falling.

Mon, 11/10/2014 - 18:04 | 5434031 arrowrod
arrowrod's picture

So, according to ZH, the price of Au is wrong. 

Just think, if you had enough money, you could buy 10,000 tons of Gold, and an army to protect it. 

You would be rich, rich, rich.

Mon, 11/10/2014 - 19:00 | 5434266 BringOnTheAsteroid
BringOnTheAsteroid's picture

It would be extremely expensive to kit an entire army out in scuba gear

Mon, 11/10/2014 - 18:08 | 5434037 ejmoosa
ejmoosa's picture

So the more money printed, the more that printed money will buy.  

Most thinking people know that is bullshit.

It's like pumping gasoline into a building and saying see, gasoline isn't flammable.

Until someone sparks a Zippo.....

Mon, 11/10/2014 - 18:33 | 5434128 AUD
AUD's picture

This guy is a complete fucking moron. Financial markets are wildly inflated, particularly in the US. Deflation my arse.

Dumb cunt obviously doesn't even look at the S&P before posting this shit.

Mon, 11/10/2014 - 18:36 | 5434149 Schmuck Raker
Schmuck Raker's picture

"Deflation Comes Knocking On The Door"

<knock, knock, knock> "Who is it?"

"Candy-Gram"...

Mon, 11/10/2014 - 18:40 | 5434182 KurtRand
KurtRand's picture

Forget about printing and "value " of Gold. The way to Combat Deflation is to Lower Taxes.   

Taxes and Taxes alone create the value of fiat currency. If there were no taxes Fiat would be worthless. 

Example: If you were to go to jail unless you can come up with $100k then there is suddenly implied value on accumulating $100k. 

Supply of fiat has nothing to do with inflation (except increasing the monetary base).

Govt demand (of citizens fiat money) has everything to do with inflation. The more the Gov't demands of the fiat base, the more valuable it becomes. The less they demand of the fiat the less valuable it becomes hence deflationary pressures. 

Mon, 11/10/2014 - 19:06 | 5434301 MollyHacker
MollyHacker's picture

Back in 30s guys with automatic machine guns guarded the rail cars arriving at Fort Knox, there wasn't any backwardation then!

Mon, 11/10/2014 - 19:55 | 5434511 SAT 800
SAT 800's picture

Those automatic machine guns are so much better than the kind you have to run with a crank.

Tue, 11/11/2014 - 05:44 | 5435782 goldbear
goldbear's picture

whatever happened to hyperinflation ? i thought that is why we were buying gold....now deflation ? still we buy gold ?

Tue, 11/11/2014 - 07:36 | 5435872 filosofo
filosofo's picture

The point here is how you measure inflation. And where. The long term trend (say this decade, or longer)  for commodities and basic goods is up everywhere in the planet. Also for all kinds of assets. Short term noise usually wins.

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