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.