Stagflation Threatens Western Economies – Gold A Bubble, To Correct Or Go Parabolic As Per 1970’s?

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Tue, 08/16/2011 - 07:21 | 1564610 FoieGras
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Stagflation would mean nominal GDP rising in the double digits. Where is that actually happening? USA? UK? Germany? Spain? Japan?


Stagnating nominal GDP is a signature of deflation. The rising gold prices of the last 10 years are a signal of a deflationary bust. Gold is money. Cars, stocks, homes, TVs and granite kitchen couter tops are not.

Tue, 08/16/2011 - 07:28 | 1564631 Debugas
Debugas's picture

I have to reply to this that the reason we had no (or rather mild) inflation so far in the US is because all the money Bernanke printed was falling onto very large credit hole (large M3 vs M1).

THIS TIME however the credit multiplier has been to large extent decreased already and any additional emmision from the Fed WILL CAUSE HIGH INFLATION

Tue, 08/16/2011 - 08:02 | 1564709 Thomas
Thomas's picture

I would argue that is because the bean counters who measure inflation are a bunch of liars.

Tue, 08/16/2011 - 09:06 | 1564863 Smiddywesson
Smiddywesson's picture

I have to agree that the deflationists were right, but that won't prevent currency destruction and hyperinflation.  Their arguments about gold crashing in price because debt unwinding is inherently deflationary, thereby making money more scarce and more valuable, appears childish and overly academic in hindsight.  Gold is money, everything else is deflating.  Maybe if we had a solid currency they would have won that argument too, but it is irrelevant in our current situation.

The game was to keep the money in the hands of the banks, who promised to keep it out of commodities and in equities.  Then they gave the banks as much inside information as they could and also manipulated the markets.  This is stealing of course, but we are doing God's work.  Unfortunately, the banks are not the only ones playing in the equities markets, so those who know the game took their winnings right into commodities and created inflation.  I also suspect the banks didn't keep their promises, but banks will be banks.

The game changed when things just got worse.  The economy didn't do what the egg heads thought, and the extent of the fraud in the financial sector made it unsavable.  That's when the end game in gold started, and central banks started to stack.  Now it's all kick the can and stack gold.  This will all end in tears for those who have no gold.

Tue, 08/16/2011 - 11:01 | 1565258 stirners_ghost
stirners_ghost's picture

Under fiat government (that is, the only kind), money is--whatever the boss says. The fiefs accept whatever.

Leaving aside central banks' floundering and gradually failing attempts to debase currency, can the dollar be in any real danger? It's what the US' peerless war racket (not just the military, but also the domestic warmongers/"law enforcement") accepts as payment, and requires you to accept as payment for settlement of obligations (legal tender). This is where fiat money becomes real, as with all things governed--at the end of a gun.

Shiny yellow metal seems quaint by comparison; it has no teeth.

You'll see deflation in gold. As long as the gullible masses continue to worship at the altar of Hobbes, Locke, and Rousseau, government currency will be your currency, and the overarching tendency will be towards deflation (which central banks will continue to fight, impotently) from here on out--accessible natural resources are trending down. This entire episode that has been a predictable convulsion resulting from exponential growth hitting a brick wall.

Tue, 08/16/2011 - 07:34 | 1564651 Mike2756
Mike2756's picture

Stagnation more likely, austerity in play and no unions to demand higher wages.

Tue, 08/16/2011 - 09:08 | 1564877 Smiddywesson
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In Weimar Germany, union members were somewhat protected by rising prices, everybody else got squeezed.

Tue, 08/16/2011 - 07:41 | 1564669 ZeroPower
ZeroPower's picture

Rental properties are definitely money: inflation = net price rises, so does the rent you charge; deflation = net price drops {only slightly}, but as people switch from houses and condos and require rentals, supply suddenly dimishes and you can raise rent as well. 

Tue, 08/16/2011 - 09:13 | 1564893 Smiddywesson
Smiddywesson's picture

Rental properties will do better than most other investments, but they are not completely safe.  The tax man can change the game anytime he wants.  More potential renters diminishes supply, but a large supply of empty houses means competition from them entering the game.  Additionally, the job market is horrible, and you may not be able to negotiate a higher rent from someone who can't pay it without evicting.  That means a lot of down time and expense. 

Everything has risk, except PMs.

Tue, 08/16/2011 - 10:26 | 1565123 FeralSerf
FeralSerf's picture

<<Everything has risk, except PMs.>>

Not so -- PMs have a real risk of confiscation and/or theft.  As the economy gets worse, that risk increases exponentially and that risk becomes a personal one as well as the risk of getting killed for one's PMs increases. The thieves will greatly outnumber the PM holders.   Desperate people (and politicians) do desperate things.

Tue, 08/16/2011 - 11:12 | 1565292 ZeroPower
ZeroPower's picture

I suppose nothing is completely safe, including PMs as the person above me referenced.

W/r/t rental properties, personally theres no better place id like to park my money than a nice 6+ family bldg complex in a decent area.

Pros: collect monthly rent which more than cover SG&A; able to raise rent by at least 3%/ann (more if local laws allow it); value of bldg can't completely collapse (prior housing collapse was much worse on single family homes, and housing being close to a bottom is on your side as well, at least in the States); acts as collateral.

Negs: price in absolute terms wont rise as fast as a bull market in gold or equities, though we all know how bull markets end; admin expenses; risk of vacant property.

The people here who like concrete stuff like PMs or their guns or canned food should value rental properties just as much. Granted its almost taboo to be talking to an American about investing in a property but my perspective should be read as extending outside of the country or at least into metropolitan centers where demand will always be there.

Tue, 08/16/2011 - 10:02 | 1565057 Stuck on Zero
Stuck on Zero's picture

As soon as landlords start doing moderately well our socialist local governments will do everyone a favor by imposing rent controls.  Bank on it.

Tue, 08/16/2011 - 07:53 | 1564693 DormRoom
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Alot of inflation is due to the US carry trade, and 0% interest.  If there is a flight back to USD, market movers will have to unwind that trade, and it will lead to a collapse in commodity prices.  Just like in '08. Deleveraging = deflation.  Not stagflation.

Tue, 08/16/2011 - 08:05 | 1564715 Thomas
Thomas's picture

Not that clear. Does anybody really think you can describe something so complex by using one of two terms? If food and energy is skying and condos in Vegas are plummeting, it all cancels: Does that mean there is no deflation or inflation? If the price of sneakers is not changing but they last 3 or 4 months before needing replacement, are they cheap or expensive? At this point, I grow weary of the money supply arguments because so much garbage is obscured in the shadow banking system.

Tue, 08/16/2011 - 09:17 | 1564911 Smiddywesson
Smiddywesson's picture

Alot of inflation is due to the US carry trade, and 0% interest.  If there is a flight back to USD, market movers will have to unwind that trade, and it will lead to a collapse in commodity prices.  Just like in '08. Deleveraging = deflation.  Not stagflation.

If you are suggesting that the USA will raise interest rates anytime before the end of this charade, think again.  Most of our debt was switched to short term debt over a decade ago.  Our debt levels cannot withstand higher interest rates, so you won't see them before a complete collapse, or a controlled switch to an entirely new system.

There is not going to be a flight back to the USD, the price of gold indicates where this is going.

Tue, 08/16/2011 - 10:32 | 1565139 FeralSerf
FeralSerf's picture

<<There is not going to be a flight back to the USD, the price of gold indicates where this is going.>>

There will be if there's a major war.  Nobody has as large a military as the Americans do.  That military will be seen, mistakenly IMHO, as the safe haven.

Tue, 08/16/2011 - 12:30 | 1565736 Hugh_Jorgan
Hugh_Jorgan's picture

<"There is not going to be a flight back to the USD, the price of gold indicates where this is going.">

Long term you're right, but in the short term the EuroZone collapse will probably cause lots of clueless people to move back to the USD which will drive it up, thus driving corporate profit down. Many more people will then wake up to the reality of what we face. I think that this in turn will move the whole world into a mode of capitulation regarding our economic woes at which time gold could go into the parabolic move that some are predicting. Until most of the world is thinking that the end of the world is here, the USD is still considered a backstop to the moneyed western world, obviously this is an ignorant opinion these days, but a reality nonetheless.

Tue, 08/16/2011 - 12:25 | 1565707 narnia
narnia's picture

carry trade is borrowing your own currency & selling it to purchase currency of another denomination to invest in that denomination.  you'll notice that countries with currencies pegged to the $ who have higher government borrowing rates are the most vulnerable (sell $, buy other currency, purchase govt bonds/other highly liquid assets in that currency).  this trade weakens the $ & mainfests itself in inflation in these economies (since the currency cannot provide a counterbalancing force).

i'm sure some highly leveraged funds are speculating in commodities, but they are engaging in that trade directly (buying $ to sell $ to buy another currency to sell that other currency to buy $ to buy $ denominated commodities has some obvious unnecessary steps).

i do see a reason why china & other net exporters with exposure to US debt would want to purchase $ denominated commodities instead of government debt. this preference has clearly had an effect in the markets.

cutting to the chase...  if the carry trade goes away, tons of other currencies will be sold, tons of $ will be purchased.  the $ will strengthen & other currencies will fall. it's not the deleveraging of this carry trade that will materially cause the price to go down.  it's the currency effect, which is materially affected by tons of other economic activities & is one of a myriad of factors affecting the price of commodities.

Tue, 08/16/2011 - 07:56 | 1564698 Snidley Whipsnae
Snidley Whipsnae's picture

Hello author??? Here is what is driving PMs... and this is just one purchase among many... PMs are going EAST, when will the clueless scribblers get it?

"Vietnam to buy 5 tons of gold to ease market crunch"

Tue, 08/16/2011 - 08:11 | 1564720 Thomas
Thomas's picture

The sovereigns are buyers. No hedge fund will override that trend (nor would they bother to try). Hard to make a long-term bearish case for gold right now. Bring in Paul V and we can talk. Until then, I intend to enter my 12th year as a gold investor with all precious metal-based investments fully intact. (The equities are, admittedly, beyond frustrating. Are these companies run by idiots or something?)

Tue, 08/16/2011 - 08:30 | 1564765 Snidley Whipsnae
Snidley Whipsnae's picture

A gold miner is a liar standing next to a hole in the ground...

Tue, 08/16/2011 - 10:04 | 1565063 Stuck on Zero
Stuck on Zero's picture

What's a banker?

Tue, 08/16/2011 - 10:31 | 1565136 mick_richfield
mick_richfield's picture

A thief standing next to a hole in the U.S. Treasury.



Tue, 08/16/2011 - 10:37 | 1565157 FeralSerf
FeralSerf's picture

<<What's a banker?>>

"Give me your money.   I'll protect it from, er I mean for, you.  I promise to give it back to you when you want it.  Really!"

Tue, 08/16/2011 - 09:14 | 1564899 speculator
speculator's picture

Yes, lots of idiots, and lots of shady promoters. Nonetheless, the HUI is up 14x since 2000, while gold is up 6.5x.

The explorers tripled last fall, so it's not surprising to see them stagnate for a while. Explorer index chart:

Producers have been the underachievers of the last couple of years, but are starting to generate massive cash flows with this gold price. Producer index chart:


Tue, 08/16/2011 - 09:22 | 1564928 Flakmeister
Flakmeister's picture

Patience and research is about to be rewarded.....

Tue, 08/16/2011 - 12:39 | 1565786 speculator
speculator's picture

It's a bitch to find solid companies in this business. Here's my research tool for making purely quantitative value assessments (but caveat emptor - Bre-X looked great on paper):


Tue, 08/16/2011 - 17:08 | 1566767 Flakmeister
Flakmeister's picture

Thanks I'll check it out.

Tue, 08/16/2011 - 09:28 | 1564943 Smiddywesson
Smiddywesson's picture

I don't believe we will see confiscation of physical from the public, but we very well may see nationalization of the miners.  It would be wise to spread your bets.  The precedent is there with the GM common stock holders.  They were run over by the government.

Tue, 08/16/2011 - 09:34 | 1564963 Flakmeister
Flakmeister's picture

Yes, nationalization is a risk.... that is why I favor Canadian producers with domestic resources...

Tue, 08/16/2011 - 10:47 | 1565196 FeralSerf
FeralSerf's picture

Canadians have become the Americans' poodles.  They will turn over your (assuming you're an American) gold to the American kleptocracy in a heartbeat when TSHTF.

Tue, 08/16/2011 - 17:06 | 1566762 Flakmeister
Flakmeister's picture

You have no idea what you are talking about....

Tue, 08/16/2011 - 19:16 | 1567136 FeralSerf
FeralSerf's picture

It's amazing how many people stake their entire future solely on hope.  Have you paid any attention to what the IRS has done to Swiss financial "independence"?  Do you think the Canadians are more independent from the Americans than the Swiss?  The Swiss that held off the Nazis?  Give me a break!

Do you remember what the Canadians did to the foreign holders of Canadian trusts?  I learned my lesson real good on that one!

Good luck on your Canadian investments.

Tue, 08/16/2011 - 23:35 | 1567824 Flakmeister
Flakmeister's picture

You have a preconcieved notion of what things are and how they play out. You likely have never lived abroad. Also you have no idea about my situation. So really just STFU.


Tue, 08/16/2011 - 10:44 | 1565183 FeralSerf
FeralSerf's picture

Physical gold is always confiscated  from the public when the government gets sufficiently large and tyrannical.  Count on it.   Anything else is wishful thinking.  Where else are they to obtain the wealth necessary to pay themselves and their police when they are unable to collect taxes and no one will accept their paper anymore?

Tue, 08/16/2011 - 09:21 | 1564923 Smiddywesson
Smiddywesson's picture

There is no technical or fundamental reason behind this market.  The reason has nothing to do with market forces.  The real reason it won't crash is because if they let it crash, it will mess up their plan for a new system.  The reason is found in sovereign and central bank purchases of gold.

Tue, 08/16/2011 - 09:03 | 1564854 A Man without Q...
A Man without Qualities's picture

"Stagflation would mean nominal GDP rising in the double digits."

Utter nonsense..  There is no hard definition, but the general idea is high price inflation relative to growth.  


Tue, 08/16/2011 - 10:23 | 1565108 Capsaicin
Capsaicin's picture

So let me get this is either going up or down. Gutsy call.

Tue, 08/16/2011 - 07:24 | 1564612 Debugas
Debugas's picture

the reason gold crashed in 1970’s was Paul Volcker raising interest rates to have positive real interests. Absent that drastic increase the gold will continue up

Tue, 08/16/2011 - 09:25 | 1564936 Flakmeister
Flakmeister's picture

January 1980 was the blow off top.... get your dates straight. Gold also rocketed up as the 10 yr yield increased in 1979....

The game is very different this time. The US is all in, nothing left in the pot, no significant new sources of oil on the horizon....

Tue, 08/16/2011 - 10:05 | 1565068 Stuck on Zero
Stuck on Zero's picture

Gold also crashed because the Soviet Union was selling gold to support its economy.

Tue, 08/16/2011 - 07:28 | 1564619 oobrien
oobrien's picture

Gold is about to die on the vine.


The global governments have too much power.

Soon gold will be outlawed.

What should we do?

Tune in, turn on, and drop out.

Fuck it all in the ass!

Let's sing the Ben Bernanke Song:

First they ignore you.

After that, they fight you.

Then they lose.

Or so said Gandhi.

I like that Asian.

He reminds me of Jesus Christ.

Tue, 08/16/2011 - 07:58 | 1564702 Snidley Whipsnae
Snidley Whipsnae's picture

Jim Rickards to CNBC bobble heads...

Jim Rickards & the Euro Gold Standard. To banks, “Sorry, you played, you lost”

Tue, 08/16/2011 - 07:25 | 1564620 Popo
Popo's picture

And don't look now, but Krugman just trotted out the ditch digging fallacy (ie:  If we pay people to dig ditches and fill them back up it will help the economy) proving to the world that he is an intellectual fraud.  (Also known as Bastiat's Broken Window Fallacy).  Economists all over the world are pretty much laughing at the guy.   Career implosion.   Looks like he forgot to study Economics somewhere along the way...



Tue, 08/16/2011 - 07:32 | 1564645 Debugas
Debugas's picture

"pay people to dig ditches and fill them back up" can indeed help under certain conditions and we are exactly at these conditions. However it would be more wise to pay people money for doing something usefull (definition of being useful is debatable of cause).

Let me explain - imagine a world were almost everything is produced by robots - people do not have to work to enjoy the fruits of automated production. The problem is people do not have the money to pay for the products but if we give them money they will buy more products without actually raising the prices up until the production capacity is maxed

Tue, 08/16/2011 - 07:40 | 1564667 Pay Day Today
Pay Day Today's picture

Thanks. Nothing worse than people spreading fallacious fallacies.

Tue, 08/16/2011 - 08:05 | 1564714 Doña K
Doña K's picture

Production can be reduced to one word. "Energy"

Tue, 08/16/2011 - 08:36 | 1564781 Peter Pan
Peter Pan's picture

I for one believe that digging ditches and filling them up again makes sound economic sense provided you bury some of the clowns in the Fed, the government, academia and the economics profession before you fill the ditches up.

Tue, 08/16/2011 - 08:52 | 1564821 prole
prole's picture

That suggestion sir, is outragious!

Tue, 08/16/2011 - 09:24 | 1564932 speculator
speculator's picture

You just made a Keynesian out of me.

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