As we enter a crucial phase of the economic crisis it seems that the most pertinent question is: will the next phase of the crisis be inflationary or deflationary in nature? Of course, this question is of central importance to precious metals investors. As the gold standard is no longer in use, would it be rational to assume that gold would decrease in price in a deflationary situation, and that holding fiat would be the most rational course of action? Would it be wise for gold investors to sell in the near future and hold cash away from the banks, and wait for the price of gold to decrease and for the central banks to inflate the money supply before buying again to protect against inflation? It’s possible, however, that whilst there is a liquidity crisis with the banks the last thing the powers that be want is a deflationary crash. Therefore, it may be that the central banks will choose to flood the world with more fiat in their attempt to prevent defaltion. But would this course of action be guaranteed to work, especially if there were a systemic collapse of the banking infrastrucure? What on earth is going on; it is so confusing and so difficult to know how to protect oneself and ones family from the coming onalught. [:S]
By the way, it’s a nice forum you have here indeed. [:)]
Investing in gold, your long-term inflation-adjusted return should be 0% minus transaction costs. The scary part is that this may really be the best investment out there!
I don’t consider hyperdeflation to be a serious risk. The Federal Reserve can always print more money to prevent hyperdeflation. Right now, the Federal Reserve is heavily inflating to bail out Fannie Mae, Freddie Mac, Citigroup, and the other big banks. Small banks may go broke (and IndyMac is “small”), but the big boys ALWAYS qualify for a bailout.
In a SHTF scenario, physical gold or silver is insufficent. You also need people you trust that you buy and sell from.
The merit of gold is that, if TSHTF, and then things settle down a few months later, your gold and silver should preserve their purchasing power. In the meantime, fiat paper and stocks may be completely worthless. Gold and silver are a decent investment, if you have a safe place to keep it and can survive a crisis.
I’ve been collecting metals for getting on two years now. If I were to sell then I’d certainly make gains on my cost average. However, the issue is not profit but protection of wealth. Is now a good time to buy metals? I’m not sure. Of course, fundamentalist gold-bulls will tell you that anytime is a good time to buy gold. But, as Jim Rogers says, “I don’t like to buy something when it’s near an all time high”. Of course, it’s possible that gold will reach higher highs in the short- medium-term, but it could also fall. My personal feeling is that we’ll see it hit over a thousand again just after the Olympics, and then it all depends on whether deflation rears its ugly head. If the money supply does contract then there will be less people able to buy gold and the price will fall. Cash will be king. I’m not sure I see a proper SHTF/EOTWAWKI situation where fiat currency is valueless. In this kind of situation gold and, possibly more importantly silver, would be useful for barter trades. Of course, the problem in this scenario is that one really doesn’t want people to know one holds PMs. It’s certainly true that you don’t want to be the only house in your street with purchasing power. That’s an invitation to Danger Close.
I don’t know what is better; deflation or inflation.
DRS, I am in a similar situation and have similar questions. It seems to me that the key thing to understand is this distinction:
Of course, I understand that the Fed is now printing and will continue to print up money as fast as it can, and that this increase in dollars represents inflation.
BUT - the money supply is not merely the dollars printed up - the far greater percentage of the money supply comes from banks making loans (i.e. this creates money). So in the current environment, that’s not happening of course - the credit crunch is the term used to reference this situation. Seems to me that is immensely deflationary.
So - which wins? What is really happening to the money supply, on net? Is it increasing - inflation - or is it decreasing - deflation?
I hope someone can share some insight into this seeming conundrum.
BTW, hard to believe Jim Rogers implied that gold is near it’s all time high - in inflation adjusted dollars, gold’s all time high is about $2300/oz. Might he have been talking about oil, which IS at its all time inflation adjusted high?
Just theorizing here so don’t use it for any investment decisions…
I’m thinking that the Powers that Be will start selling off their gold stocks after a bit to both lower the market price of gold (which is an embarrassment to them) and also to take some of the fiat money out of the system to prevent hyperinflation/finance their projects.
The World Bank (or maybe IMF) was talking about selling something like 400 tons of gold a while back to make up for budget deficits that they are facing. While this is good for getting gold back into the hands of the people after it was stolen by the governments of the world it will most likely be bad for the market price of gold.
As to protecting your family from the coming onslaught you would probably get a lot more ‘bang for your buck’ investing in lead.
I want to invest in lead, but my mother will not allow it at the moment(i am 16). So I am buying a gold ETF now but in SHTF scenario that is almost worthless. I gotta get me some good ol fashion gold bars.
This was already announced a few months back and so is priced into the market (which is, remember, a leading indicator), and thus is immaterial to the price of gold going forward.
Can anyone address the fundamental question from the standpoint of Austrian economics: printing more money = inflation, but credit crunch = deflation. So will the net result be an increase or a decrease in the overall money supply? Seems to me that the answer to this question would form a pretty decent basis (assuming all other things being equal [which of course they are not but I don’t want to get into that yet]) for whether gold goes up or down (or more properly, whether dollars go down or up vis a vis gold).
At this point, it seems clear to me that, in order for the feds to meet the obligations they have made to the baby boomers, the ONLY option is to inflate the currency vastly in the comnig decades - so we know this is on the way [in fact, it’s already started, of course]. That is, our rulers have promised the baby boomers money, and there’s not enough, so they’ll need to print more. Of course, this money won’t be worth what it once was, and so will not purchase the amount of goods and services the oldsters are expecting (get used to 70-year old pizza delivery guys and wrinkles at the McDonald’s counter), but that’s just too bad of course - because it will enable the govt to 1) say it kept its promises, and 2) get another swipe at post-tax dollars as inflation convertes those into pre-tax dollars (in the form of property taxes and cap gains on investments which rise in dollar-value [if not real value]). What a sweet deal!
So since this seems to be the only way for the govt to ‘keep its word’ (rofl), inflation is a sure bet and gold seems to be a good safe haven. But that damned credit crunch keeps nagging at me, since it represents a severe contraction in the money supply. Don’t know how to do that analysis.
Look into the Perth Mint’s gold certificate program. Almost as good as holding bullion, but you don’t have to store it (or pay for same), etc. Resolves the logistical problem. Of course, you’ll need to be able to get to Australia or ship from there at some point if you want to take possession, so if in fact the SHTF scenario comes about, you may be up shit creek. But then, if SHTF, you’ll probably be a lot more worried about food and water, and having a big bag of gold to lug around may well cause you more problems than it solves.
Consider investing in a food garden and a rainwater catchment system, for starters. At the least, you will learn some invaluable skills along the way which will may well stand you in better stead than a stash of gold. Now that’s an investment that could pay off handsomely.
Sure. You buy a house (or other asset) for $100k with post-tax dollars. The Fed inflates the money supply. Years later, that house is worth $200k. Assume nothing about the house changed - it is inflation pure and simple that’s caused the “value” to go from $100k to $200k (i.e. a more accurate way to look at it: the dollar is now worth half what it was when you bought the house and so the house appears to be twice as valuable - the nominal value has not changed). Property taxes are assessed based on the inflated value. Also, when you sell, if subject to cap gains tax, you are taxed on the inflated value. This is how inflation by the govt turns post-tax dollars into pre-tax dollars. It’s asset seizure via an inflation tax.
But CPI is a fraudulent government statistic, and is M3 the correct metric? What about MZM? I can’t figure out how to even begin to quantify the ‘money supply’ - and if you look at charts opf MZM or M2 or whatever vs inflation (as measured by CPI), there just does not seem to be a good correlation. Maybe a chart of MZM or M2 or M3 vs gold would be better? I have no idea, and that’s why I hope someone here could explain.
I wrote a post on money supply statistics. My favorite money supply statistics are M2 and the no longer published M3. I consider the price of gold to be a reasonable subsitute for M3. If you don’t like gold, use silver, copper, or other metal prices; they are tightly correlated.
CPI is not fraudulent, it does actually show consumer prices. The problem with it is that they took out energy and food prices a few decades ago. That doesn’t mean it’s fraudulent, however. We haven’t seen decreasing CPI for over 50 years. M3 is the measure of the total monetary supply, although it has been discontinued recently (although SGS has it’s own version).
Unfortunately, there really is no “inflation proof” investment. The price of gold and silver also vary, for example, we had growing money supply in the late 90s but a falling gold price. The price of gold and silver rely a lot on supply and demand, like every other commodity. Although gold, silver, and other inflation hedges have their drawbacks, now is a good time to invest since they’ve been rising in value and will foreseeably continue to rise as long as we have a Fed more concerned with the integrity of the current financial system than inflation.
Thanks for the link - will read it ASAP. Interesting thing: the point of the exercise is to decide, based on money supply trend, whether to hold gold (money supply increasing going forward) or shed it (money supply contracting going forward), so using gold as the yardstick sorta torpedoes that.
I suppose, long term, I simply cannot imagine this government giving up its inflationary ways, to which it is as surely addicted as to spending and debt and oil. Until and unless that changes, hard to imagine gold being a bad long term bet.
This is non-factual. The CPI does include food/energy prices. It’s the core CPI that does not. Both are reported monthly.
Further, the CPI is a calculated number - calculated by federal bureaucrats in the Bureau of Labor Statistics (based on a ‘basket’ of goods and services selected by - you guessed it - BLS’s disinterested, diligent and honest bureaucrats and political appointees [who would no doubt be shocked - SHOCKED - to find any book cooking going on there]). Are you willing to vouch for both the uprightness of the political appointess that run this entity AND the methodology which their flunkies use to make their calculations (which they conveniently changed back in 1998)?? Do some research on Bill Gross to see what this highly credible bond fund manager has to say about the CPI if you don’t believe me.
I stand by my initial assertion: the CPI is fraudulent, like just about everything else that comes from this government. Not that I feel strongly about it or anything.
I agree with you on no-such-thing-as-inflation-proofing. And I also agree that the probability is that gold will continue its rise, as long as government manipulation does not somehow derail it. Fed can’t raise rates for a while, true, but seems like government always has a sapper in its back pocket that it can pull out to muck things up for the rest of us. If there are real intimations by oil exporters, China, etc that they intent off load their US dollar holdings or to start selling oil in euros, then the feds will have to do something to shore up the buck, which will undermine gold. A new Bretton Woods of some sort is not out of the question…
I wrote a post on the fraudulent nature of CPI. I’ll offer you the following trade. I’ll pay you CPI+2%, and you pay me the return on a gold investment. Is that a fair trade?
OK, I read it, and very much appreciate the informative nature (also read several others posts - very good stuff - kudos!). The question I have is: why do you dislike the MZM? From another source, I found this:
“MZM is Money of Zero Maturity, but is it, really. Of this almost $8000 bln about 90% is just numbers on bank accounts, which is money that the banks owe to depositors. The amount of actual dollars, both in paper and in Fed deposits, is about $800 bln, of 10% of the MZM.”
So it looks to me like MZM captures the non-existent money which depositors think banks are holding for them (which they are not thanks to fractional reserve requirements). Does this “money” not in fact “count” toward inflation, per Austrian economics?
I know Mises referred to the money supply when defining inflation - what was his definition?
Either way, your post about gold and silver price manipulation gave me new reason to continue to hold gold/silver. Was alo wondernig what you think of the Perth Mint’s certificate program.
Re: MZM - I think I got it. Maybe. Since inflation is defined as a money supply which is increasing faster than the goods and services that money is chasing, and since MZM is imaginary money which cannot therefore chase goods or services, it should be immaterial to any measure of inflation, or at least the part of it that is truly imaginary. Is this accurate?
When considering this inflation/deflation question, shouldn’t consider that dollars currently held by foreign investors (including China, Russia, Saudi’s, etc) could come flooding back into this country? Our Status as World Reserve Currency has in isolated us from inflationary pressures for some time, because people buy up our debt, and have held our currency for stability. If all those dollars come back to us because it begins to lose its status as the World Reserve Currency, or for any other reason, the Fed would need a huge sponge to mop it all up. Not sure they could stem the tide. This of course would be additional inflationary pressure to plain old printing money to spend on wars, bailouts, etc. would it not?
