Taylor On Inflation & Gold
Some Questions for My Inflationist Friends
Most gold bugs believe gold will surge on inflation. They are very skeptical about the potential for gold to rise in light of deflation, even though history suggests gold performs far better during deflationary episodes rather than inflationary events. I frequently receive questions from my readers and those who read some of what I write on some of the Internet sites. I try to answer their challenges to my deflationary views as much as time
permits me to do so.
Sometimes questions are best answered with questions, and so on the topic of inflation/deflation, I found the following excerpted material written by a fellow deflationist, namely Mike Shedlock ("Mish") to be very worthwhile. It turns the widely based assumption-that nations can always inflate their debt problems away by
printing money-on its head.
Questions for Inflationists in the Infaltion/Deflation Debate
"I keep getting e-mail responses to my articles telling me why I am wrong about deflation. I also keep seeing posts, like the following one, explaining why inflation is inevitable. This recent post from "Wendy" on The Motley Fool is typical:
"It's clear from this that the same factors that threaten to pop the U.S. real estate bubble would also pop a worldwide real estate bubble. Like the popping of Japan's real estate bubble in 1990, this could lead to long-term recession.
"I believe that the world's central banks would flood the world with liquidity to prevent this from happening. Both Japan and China have already done this, with the central banks 'creating' hundreds of billions of dollars worth of their own currencies, which they used to buy U.S. Treasuries.
"This is a major reason that I believe that the economic problem of the future will be inflation, not recession." "OK, Wendy -- or any other inflationists out there -- it's time to step up to the plate. Here are the questions I would like you to address:
"1. Can you please define the ending point in your cycle? Does the cycle end when everyone has three houses and no renters? Twenty houses and no renters?
"2. Can the government print money from now until the end of time to forestall a recession? If it's so easy to prevent a recession by printing money, why do we ever have them?
"3. Is there no end to the demand for credit regardless of wage growth, outsourcing, and loss of union and other jobs?
"4. Can Japan keep printing money and buying U.S. Treasuries until U.S. Treasury rates hit zero? What then?
"5. Can home prices keep climbing exponentially if wages do not support prices?
"6. How are people going to pay property taxes and medical expenses unless wages pick up?
"7. Is GM about to offer unions more money?
"8. Is outsourcing to India and China about to stop?
"9. Are telecom mergers -- slated to destroy 20,000 jobs this year -- going to reverse?
"10. Are bank mergers and other mergers that will destroy jobs going to stop?
"11. Is productivity going to fall off a cliff so that more workers will be needed tomorrow than are needed today?
12. Are wages and employment going to rise while outsourcing, mergers, and productivity are increasing?
"13. Is the demand for housing infinite regardless of price?
"14. Is the willingness to supply credit for housing infinite regardless of price and regardless of the credit worthiness of borrowers?
"Can ANY inflationist out there please address all of those questions in a single, coherent post and tell me how-- with falling wages and stagnant jobs -- the demand for money AND the willingness to lend it can be infinite?
"Right now, people are willing to borrow and banks are willing to lend on the foolish belief that housing prices can rise forever. We had the exact same belief about the stock market in 2000. The only logical way to believe in inflation is to believe that credit expansion and the willingness to lend can go on forever in spite of falling wages and job losses to mergers and outsourcing.
"Wait a second. That's not logical at all. Then again, perhaps you think outsourcing will stop, GM will raise wages, airlines will become profitable, medical expenses will drop, and property taxes will not increase with rising home prices. Hmm, that does not exactly seem very logical, either. Is this a new paradigm such that logic and fundamentals will be meaningless from now until forever more?
"I have one final issue I would like inflationists to address: It would seem to me that hyperinflation would bail out debtors at the expense of banks and lenders. Are banks going to want to do that? If so, why? Wouldn't that make all of the malinvestment in property a smart thing to do? Does that seem likely or logical?
"OK, would some inflationist out there please tie all of those questions together for me in a nice, logical reply? I am getting tired of the short answer always offered to every deflationist argument: "The Fed will not allow deflation and will print its way out of it."
"It is time for someone to step up to the plate and put some consistently logical reasons together addressing the questions I laid out above -- and then tackle the final nut to crack, why banks would bring hyperinflation on themselves to bail out debtors at their expense.
"I have been asking these questions for months and still have not found a taker.
"Any takers?
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Ian Gordon Opines on the Gold Markets
Ian Gordon puts the current gold market in perspective from a technical and fundamental viewpoint. Ian believes the move higher by gold against virtually all currencies is a very important development as do I. You may want to go to Ian's web site to view some of the very bullish gold and gold share charts that he has posted there. Ian has a host of other very interesting items on his site, including of course some great charts on the Kondratieff cycle. Go to www.thelongwaveanalyst.com to catch Ian's great insights into the deflationary forces that will ultimately force reality into the minds and hearts of an economics profession and society gone mad.
Technical Analysis of Gold, Silver and Associated Shares.
June 9th, 2005.
Gold and Silver and their associated shares appear to be beginning the next up leg of the bull market, which suggests considerably higher prices are in the offing.
A review of many of the weekly charts shows weekly key point reversal bottoms. Key point reversals have proven to be a reliable indicator of a trend change. The fact that so many of the charts have exhibited this trend reversal adds confidence to the prediction that the new up leg is in its early stages. (A key point reversal bottom is evidenced when price makes a new low, but closes above the closing price of the adjacent bar. A top reversal is vice versa)
Technical indicators like the MACDI and Stochastic are oversold and have turned up. In some cases the faster moving average has already crossed the slower one which confirms the intermediate term 'buy' signal.
While the monthly charts do not exhibit the same degree of 'oversold' as do the weekly charts, they do indicate a reversal to the upside. For example, the HUI monthly chart shows a key point reversal bottom in May. In major bull markets, such as we are now in for gold and silver, monthly charts seldom exhibit oversold conditions.
Fundamentally what's the reason for this technical bullish appraisal?
Technical analysis gives no consideration to fundamental analysis. Technicians believe that future economic and fundamental news is already reflected in the price and volume characteristics displayed on a chart. However, there does seem to be a fundamental reason to support this technical appraisal.
During the last Kondratieff winter, a world currency crisis developed, following Austria's defection in early 1931 from the international gold standard system. Then, every currency became suspect, because every country was printing money in an effort to offset the ravages of deflation. At that time any country's gold could be exchanged for its currency at a fixed gold price.
With all the monetary expansion, gold became the money of choice. After Austria and Germany succumbed, speculators eyed the next country's currency that might be forced off the gold standard. They swapped that country's currency for its gold.
So it was that the mighty British pound came under attack. The loss of its gold forced Britain off the gold standard in September 1931. It didn't stop there.
The next suspect currency was the dollar. Although the US was the world's largest creditor nation, so many dollars had been printed to offset the Depression that American gold was much preferred to American paper. Shortly before he left office, President Hoover was advised by his Secretary of the Treasury that the US Treasury was running out of gold. As most people had expected, the response of President Hoover's successor,
President Roosevelt, was to effectively take America off the gold standard system within a month of his inauguration.
This spelled the final collapse of the international monetary system.
Fast forward to today in the present Kondratieff winter where a similar currency crisis is in the making. All currencies are suspect. Just too much paper money has been created to fight this Kondratieff winter. Gold is becoming the money of choice as it was in the 1930s. "I actually think that for the first time during this rally, you could argue that gold is genuinely benefiting from concerns people have about currencies." Precious metals
trader, June 2005. Gold has just made a new all time high in Euros.
Unlike the 1930s, the price of gold is not fixed and so its price must increase as demand rises, particularly in the face of declining supply and that is what the charts are telling us.
Ian Gordon. The Long Wave Analyst, June 2005.
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June 25, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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