DEFLATION (understand the issue)

I really have to tune-out those who don't understand the facts. 98% of all of the blah-blah that I hear on TV is nonsense. You have to really read into the news for the truth.

irving fisher debt deflation theory

If you have well meaning but frightened family members tossing their life savings into gold have them read this article before the gold buggs Madoff them.

Al Martin

Planetary Deflation & The Case Against Gold; Explaining Gold to Gold Bugs Again… and Again…
(11-3-08) The financial upheaval in global financial markets has led to a sharp increase in demand for physical bullion. As a consequence premiums on gold bullion and gold bullion coins have soared to levels never before seen, where indeed we find that one-ounce bullions coins are now trading as much as 14% above their bullion value, as people continue to chase them and mints worldwide are unable to keep up with demand. We do not advise paying this tremendous premium to own gold because the price is completely unwarranted. It should be remembered that the usual premium is 3%, but we are seeing enormous premiums simply because mints can not keep up with the demand for the physical gold coins. Demand for physical bullion/coins always increases during times when the markets are in a state of upheaval.

Why? Because there has been a pickup in demand for physical gold from the “unwashed,” those who believe that gold will “shine” once again and those who believe that it will be $2000 per ounce tomorrow and those who believe the current economic turmoil will end with a round of hyperinflation. And they are wrong to believe that.

The economic calendar releases in recent weeks show a sharp deceleration in global economic growth. Indeed we saw last week through the US Q-3 GDP advance numbers that growth in the United States is now a red number, and it’s expected to fall potentially 3-4% in Q-4. We suspect that the entire planet will be in a negative growth mode by the end of this year.

The price action in gold is telling them that they are wrong. The planet is now entering into a global deflationary trend which will become more pronounced by the middle of 2009. Indeed the IMF is forecasting that global inflation will come in 2009 at a minus 2.7% number which is just another way of saying that we are at the onset of secular global deflation, wherein asset prices will continue to decline and the US dollar will continue to rise in value. “Secular,” in this case, means long term; “cyclical” means a trend that exists within a secular market.

You don’t want to be paying a premium for a commodity whose price is falling and will continue to fall. There are many growing negatives that gold must contend with. In a deflationary trend you want to hold paper, not gold -- in this case “paper” meaning the US Dollar. The US Dollar has sharply outperformed gold this year in terms of an investment.

As the “deleveraging trade” continues on this planet, the Dollar will continue to move higher and this “deleveraging trade” phenomenon will take years to complete. There are still far too may investment banks hedge funds that have n their books a leverage of 30-1 or 40-1 or greater. The process of deleveraging assets has just begun – and we are not even halfway through it. This combined with the onset of what is going to be a very deep recession at a time when speculative bubbles in a variety of asset classes have just burst ensures that we will see falling prices and the rising value of the US Dollar.

The fear that grips the gold bugs and the gloom and doom crowd (that all the banks are going to shut down tomorrow) is just that. Indeed during the last several weeks we have actually come close to that on several occasions, but that doesn’t mean gold would immediately be used in its capacity as the “currency of last resort.” It doesn’t. If banks are shut down, they are simply reopened the next day or a few days later.

The Mad Max Post-Apocalyptic vision of the future simply isn’t going to happen. It’s interesting to note that historically, in protracted periods of deflation, governments’ ability to control economies and control nation states increases dramatically.

This is an economic phenomenon we are now entering as we are transitioning from an asset overhang into what will be a paper or dollar trade. Meanwhile the gold bulls conveniently overlook the negatives. As the global economies continue to deteriorate, there is increased selling of gold by all central banks, IMF, World Bank, etc. which have gold to sell.

Indeed we have seen a pickup in the selling of bullion from any institution that has gold to sell. The Washington II Accords, which had regulated the sale of gold for central banks and the IMF, have effectively collapsed under the pressure by global regulatory and lending institutions in order to raise money. There is a mad scramble to see who can sell more gold the quickest within the world of central banks and global financial institutions. Also the new mine supply of gold on the planet continues to increase. It takes gold bugs to shill the gold again.

It should be pointed out how long it takes for a planet to ramp up gold production - from the time a piece is assayed to the time the first piece of gold comes out, including the time the mines and refineries and infrastructure is built etc. is 7 - 10 years. That’s true. But gold production has been ramping up n this planet since 2004. We are now seeing the effects of the over-production of gold.

Historically the price of gold has peaked 2-3 years before the supply of new mine gold peaks. In other words, as the price of gold peaks at any given time and continues to fall, one of the things that causes it to fall is increasing supply. We are seeing that phenomenon already. So that even in 2008 new mine supplies combined with bank and other institutional selling has brought 5500 metric tons of gold to market. That’s a record amount of gold coming to market.

In the last analysis, this is what the gold bulls hate because statistics cut both ways. Only 16% of gold is used as a monetary metal the rest of it is used as a commercial and or industrial metal.

It should also be remembered that recessions are not friendly to industrial or commercial metal uses. We have seen that gold’s other principal use which is jewelry has already begun to fall sharply. Gold’s industrial usage, particularly in semiconductors, is also declining.

Gold’s principal value is as a commercial metal, not a monetary metal. The gold bugs who incessantly promote gold are not economists. They have little understanding of Economics 101 and because most of them have a vested interest in peddling it somehow.

Gold will continue to under-perform as an asset class and will continue to fall in value. Now it’s true what the shills say that gold has risen substantially in comparison to other currencies like the Euro or the British Pound. The problem is that Americans aren’t buying and selling gold in Euros or Pounds; they’re doing it in Dollars.

In Dollar terms, it is likely that the price of gold will continue to fall because there is a host of negatives. For instance gold shills like to talk about the increase in demand, but you never hear gold shills talk about the increase in supply.

Gold is in a similar situation as it was in 1980, wherein you saw the price of gold peak in January 1980, but you didn’t see global production peak until 1983. This effectively cut the price of gold in half from 1980 to 1983. In intermediate terms, 6 months out I think you’re looking at $600 gold.

Indeed many gold shills you may have seen on CNBC or Bloomberg will admit that there is a $200 premium in gold because of ETF gold funds – which incidentally the unwashed have poured money into. More physical gold then comes to market through financial distress which further depresses the prices even more and will begin to take out that $200 premium.

As traders, we continue to short the December gold contract on rallies, as does about 80% of the trading community. The only people who are buying gold on dips versus shorting rallies are the one or two lot Joe Six Pack Unwashed. The professional side is on the short side of the gold market.

You must realize that the planet is entering a new era and it will be a period of protracted deflation and it is the only way that the planet can be held together economically and financially. In this era governmental power actually increases. This deflation is in a way being purposely brought on by governments, not in the sense of being in control during the collapse of speculative bubbles, but you will see governments fostering deflation more and more because it tends to increase governmental power at a time when governmental power needs to be increased in order to keep the planet together as the planets economies continue to unwind.

What is needed, as the unwinding continues, is for governments to stabilize the geo-political, economic and military situation of the planet or nation states will break up into little fiefdoms, which is what the gold bugs believe will happen. The reason why that isn’t going to happen is because we are entering a period of deflation, where the U.S. Dollar is going to be the king among paper currencies.

The U.S. Dollar, during deflationary times, rises against an ounce of gold.