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

Tyler Durden's picture

Submitted by Gold Core

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

All major currencies have fallen against gold today with the euro down 1% against gold on nervousness ahead of the Franco German summit. Gold is trading at USD 1,776.70, EUR 1,235.10, GBP 1,084.10, CHF 1,389.90 per ounce and 136,450 JPY/oz.  Gold’s London AM fix this morning was USD 1,779.00, EUR 1,236.18, GBP 1,086.81 per ounce.

Gold in U.S. Dollars – January 2009 to August 2011 – Daily and 50 and 144 Day Moving Averages

U.K. inflation accelerated more than economists forecast in July, as the cost of food, clothes, footwear, housing maintenance and rent increased. Negative real interest rates are getting worse as the BOE has kept interest rates at a record low of 0.5%.

5% inflation in the UK is expected in the coming months prior to hopes that inflation will abate. UK economic activity grew at just 0.2% in the second quarter of the year suggesting an annual rate of growth of 0.7% over the past twelve months. 

Economic growth is faltering in all major economies with data this morning showing Eurozone and German GDP growth slowing.

Eurozone GDP rose 0.2% from the first quarter, when it increased 0.8% while German GDP growth fell by more than expected in the second quarter, dropping to a derisory 0.1%.     

Double dip recessions involving inflation and therefore stagflation seem increasingly likely.

Gold in British Pounds – 30 Days (Tick)

Gold is overvalued in trading terms in the short term as it has risen well above its moving averages and there is the risk of a correction from these levels.

The 144 day moving average (identified by Dominic Frisby of Money Week) has provided very strong support to gold since January 2009 and should provide strong support should a material correction materialize.

The 200 day moving average provided support from 2000 to 2008 but more recently the 144 day moving average has been strong support.

As we appear to be entering the second phase of gold’s bull market the 50 and 100 day may become more important support levels.

While acknowledging the risks of a correction, one must also acknowledge that given the scale of physical demand being seen internationally there is a real possibility that gold goes parabolic as it did during the stagflation of the 1970's.

Gold surged 49.7% in 1972, 73.5% in 1973 and by 60.1% in 1974. In the final phase of the bull market in 1979, gold surged 140% in just 12 months.

Gold’s recent rise of 20% per annum since 2000 and 25% rise so far in 2011 has been tame in comparison.

Cross Currency Rates

The conditions today are far more bullish than in the 1970’s as in the 1970’s the U.S. was the largest creditor nation in the world whereas today the U.S. is the largest debtor nation the world has ever seen.

Gold went parabolic in the 1970’s after a period of stagflation. Today, we appear to be on the verge of a period of stagflation.

The 1970’s saw significant geopolitical risk with oil crisis, the overthrow of the Shah of Iran and the Russians invading Afghanistan. Today there is significant geopolitical risk in the world, arguably more, and there remains the real risk of a conflagration in the Middle East between Israel and its allies and Iran and its allies.

Today we have a global debt crisis, massive systemic risk in the financial system threatening the solvency of many banks and sovereign governments. This was not the case in the 1970’s.

This makes a parabolic move in gold very likely in the coming days, weeks and months. Increasingly, the question is not if we go parabolic rather it is when do we go parabolic – in the weeks and months or in the coming years.

Prudent diversification and owning physical bullion remain key to weathering the coming difficult years.

For the latest news and commentary on gold and financial markets follow us on Twitter.

Silver is trading at $39.33/oz, €27.37/oz and £24.02/oz. 

Platinum is trading at $1,810.50/oz, palladium at $741/oz and rhodium at $1,750/oz. 

Gold rises 0.8 percent as euro zone jitters resurface

Gold May Climb as Drop Attracts Buyers, Paulson Maintains Wager on Rally

Gold steady; eyes on Franco-German summit

Gold prices higher in Asia

(The Independent)  
Go for Gold: Yellow Metal Makes Return -

(Wall Street Journal)
The Nixon Shock Heard ‘Round the World

Nixon's Colossal Monetary Error: The Verdict 40 Years Later

Jim Rickards: Return to Gold Standard - Gold to be Revalued to $7,000

(Financial Times)
Time to question the dollar’s role as reserve

Is it time for a gold standard revival?

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FoieGras's picture

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.

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

Thomas's picture

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

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.

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.

Mike2756's picture

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

Smiddywesson's picture

In Weimar Germany, union members were somewhat protected by rising prices, everybody else got squeezed.

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. 

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.

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.

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.

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.

DormRoom'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.

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.

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.

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.

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.

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.

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"

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?)

Snidley Whipsnae's picture

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

mick_richfield's picture

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



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!"

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:


Flakmeister's picture

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

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):


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.

Flakmeister's picture

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

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.

Flakmeister's picture

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

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.

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.


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?

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.

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.  


Capsaicin's picture

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

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

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....

Stuck on Zero's picture

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

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.

Snidley Whipsnae's picture

Jim Rickards to CNBC bobble heads...

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

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...



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

Pay Day Today's picture

Thanks. Nothing worse than people spreading fallacious fallacies.

Doña K's picture

Production can be reduced to one word. "Energy"

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.

prole's picture

That suggestion sir, is outragious!

speculator's picture

You just made a Keynesian out of me.