first majestic silver

The “Deflation” Boogeyman

April 20, 2015

It’s Friday afternoon, and global stocks have had a very, very bad day. After the Chinese stock market closed for the weekend, its regulators, in their omniscient wisdom, decided to increase the amount of permitted “shortable” stocks. Consequently, Chinese stock futures fell 7%, pulling the rest of the world falling sharply as well.

With that pleasant introduction, I’ve been asked to comment on Harry Dent’s latest “deflation” warning; which I plan to enthusiastically discuss below. But first, a few other “horrible headlines” to address; starting with yet another instantaneous validation of my work; in this case, last week’s “Fed transparency revealed, from Mr. Goldman Sachs himself,” and yesterday’s Death of Credibility.” In those pieces, I not only discussed the Fed’s increasingly dovish stance – relative to Wall Street and MSM propaganda of imminent rate hikes; but their strategy of trotting out as many regional Presidents as possible to “baffle with bull—t.” To wit, yesterday alone, four such speeches occurred; one of which was neutral, one mildly hawkish (from “token hawk” Stanley Fischer, who idiotically, and ambiguously, claimed “markets can’t depend on the Fed staying on hold forever.” And last but not least, wildly dovish statements from Eric Rosengren and Dennis Lockhardt – which are far more germane, given 1) the expanding economic collapse; and 2) the fact that the FOMC’s voting committee is comprised nearly exclusively of similar “uber-doves.”

Zero Hedge tried to paint yesterday’s Precious Metals capping and “Hail Mary” rally upside stock reversal as “Fed speaker confusion.” However, in reality, there was no confusion at all, just prototypical market manipulation. Quite interesting, by the way, that amidst a dramatic worsening of the Greek crisis – Athenian riots and all – the dollar actually fell against the Euro. Frankly, I have not a clue what will occur in the near-term; but in the longer term – which may be a lot less “long” than most can imagine, I expect the Euro currency to be dissolved. And when it does, the dollar “liquidity vacuum” I predicted two years ago will intensify; but not as much as the gold and silver vacuum, when the heinous “New York Gold Pool” is overrun by the “unstoppable tsunami of reality.”

Before I get started, I have one more item to discuss; which frankly, floored even me when I read it. To wit, in a 25 year financial market career – featuring an exodus from Wall Street due to frustration regarding the conflict of interest foisted upon my research team by investment bankers – what I am about to report “takes the cake” for the most incestuous, front-running, unethical practice I have ever seen. Which is, per this article, that the Bank of Japan is actually a public company trading on a stock exchange! Worse yet, the BOJ owns 55% of its own stock, making it the ultimate holder of the type of “material non-public information” that put Ivan Boesky, Martha Stewart, and countless others in prison. Of course, in this case, the stakes are much higher; and as you can see in this chart, BOJ’s stock has surged on big volume right before every major easing announcement of the past four years. Which, by the way, is exactly what is occurring now – despite BOJ Governor Hideki Kuroda’s lie comment four days ago, that the Japanese economy is “recovering moderately.” I guess we’ll know shortly if this “indicator” is in fact the front running of a new round of catastrophic QE; but either way, the – hyperinflationary – result will be the same; as due to Japan’s hideous demographics, it unquestionably will be at the forefront of the “final currency war” until the Yen is inevitably destroyed.

That out of the way, it’s time for the “main event.” As you know, I am not a fan of the newsletter writing community in general; particularly in the Precious Metals realm – given how, by the nature of the business, the only way to garner subscribers is to come up with a conspiracy theory “tin hats” can latch on to; concoct a sensationalistic meme that excites or frightens readers to extremes; or claim one possesses actionable “proprietary” fundamental or technical analysis. And of course, ignore the single most important aspect of the “markets” they commentate on; i.e., the rampant manipulation of prices, particularly in the Precious Metals sector. Trust me, I’ve seen it all; and after 13 years in this sector, I am more disillusioned than ever by the so-called “good guys” in our sector – given so many appear to have sold their souls – and integrity – for paid subscriptions. Not all, of course, as I have been blessed to have met the best as well as the worst – such as my compatriots at the Miles Franklin Blog. However, as we act the way we speak; believe whole-heartedly in what we say; and most importantly, don’t charge for our views, I believe we are as free from “conflict of interest” as a Precious Metal dealer can possibly be.

Given that conclusion, I’m sure you think I’m here to “take Harry Dent apart,” as viciously and mercilessly as possible. But alas, I must be softening in my old age; as at this point, I’m tiring of going on the offensive. And don’t get me wrong; plenty of what Dent says – about “deflation,” demographics, and other secular factors I agree with completely – and have written about ad nauseum, such as here, and here, and here. In fact, I’d bet my spot-on prediction that the dollar would not plunge, but surge amidst the global economic crisis we are experiencing today, pre-dates nearly anyone in our business. That said, I couldn’t disagree more with his views on gold and silver. To that end, I’ll simply – calmly – discuss the flaws in Dent’s most recent article, “Gold’s Dead Cat Bounce” one by one – just as Bill Holter did a year ago. And since there are so many flaws – and my writing limit three pages – I’ll publish my rebuttal in list format.

1. First and foremost, he claims “deflation” is the enemy of gold – under the age-old propagandist canard that debt liquidation “increases dollar demand.” Yes, but it also increases demand for real assets that have proven to preserve their purchasing power throughout time – particularly during such crises. And when crises are caused by explosive money printing in the terminal stage of a fiat currency Ponzi scheme, the demand for real money increases exponentially. Not because there will necessarily be a new “gold standard” in the future, but because gold and silver are the only known substances to meet all the definitional parameters of money.

2. He discusses the “canard to end all canards”; i.e., how gold is not a crisis hedge, because it fell 33% from June to October 2008. In fact, he even goes so far as to patronize real money advocates by claiming gold “cried like a baby and ran for mommy.” For one, I was there, watching every tick; and trust me, gold didn’t “fall” 33%, but was smashed by the gold Cartel to quash its safe haven status. Moreover, Dent conveniently ignores the fact that physical gold and silver premiums soared; and in silver’s case, product was sold out for months on end, with premiums approaching 100%. Last but not least, anti-PM propagandists like to speak of the “2008 crisis” as if it ended on New Years’ Eve – when in fact, the stock market’s ultimate bottom was not until March 2009. Even with the aforementioned smash, paper gold still ended 2008 1% higher, whilst physical gold was up significantly more. And by March 2009, when the Dow was plummeting to new lows, gold had recovered all of its losses.

3. He even brings out the Great Depression claptrap – of how it was a far direr economic scenario than the late 1970s, yet gold didn’t have a parabolic run. Of course not, as the price was fixed by the government; which, in and of itself, made it a better investment than essentially all asset classes. Better yet, Roosevelt issued his infamous confiscation decree in 1933 (although no actual gold was confiscated), and simultaneously revalued the gold price higher. Furthermore, not only did gold prices vastly outperform essentially all else, but gold mining equities (which at the time were not suppressed) were, by far, the best performing market sector.

4. Possibly his most spurious claim, which I have heard in various forms over the years, is that when debt is liquidated (in the 2008-style collapse he anticipates), the supply of dollars will fall sharply, making them more “valuable.” Even Mr. Spock would blush at that shoddy logic, as the concept of a worthless asset suddenly gaining “worth” because the debt pyramid it supports collapses makes absolutely zero sense. No, when the “next 2008″ occurs, all currencies – including the dollar – will be devalued by hyper-inflationary money printing. I’m not saying I disagree with his premise that hyper-inflation won’t occur, due to the offsetting collapse of dollar-denominated assets. However, confidence in the dollar’s value – and all fiat currencies, for that matter – will be dramatically shaken, if not destroyed. This is why people bought physical gold and silver hand over fist during the 2008 and 2011 financial crises; and why they will decidedly do so again, when the “Big One” hits.

5. Next, he regresses to the playpen, with the old “you can’t buy groceries with gold,” as it is not a currency. Specifically, he taunts “gold bugs” – as if anyone that believes in gold as a means of wealth protection is some kind of hardcore “prepper” with no sense of reality, per this provocative comment…“I challenge every gold bug to take a sliver of gold or a Krugerrand to Wal-Mart or Target next time they’re buying groceries, and see if they’ll accept that as payment for the goods in the shopping cart!” Yes, Harry, I’m quite aware that gold is not currently used for day-to-day purchases; but then again, neither are stocks or bonds – or, for that matter, the real estate investments you recommend to clients. Again, we don’t own gold and silver under the expectation of a new “gold standard” – which may or may not occur; but instead, to protect purchasing power against the ravages of fiat currency inflation.

6. Last but not least – and only “last” because I have run out of space; is his commission of the cardinal sin of monetary theory by referring to “the dollar’s” strength in terms of other currencies, as opposed to real items of value. To wit, I have long discussed how it’s not possible for the “reserve currency” to collapse versus other fiat currencies during a crisis; particularly, not the key components of the dollar index, like the imploding Euro and hyper-inflating Yen. As I discussed in “if a nuclear bomb destroyed Europe,” just because the dollar goes up against the Euro, it doesn’t mean it will go up against gold. Throughout history, all 599 fiat currencies have fallen against gold; and last I looked, nearly all are doing so today. Frankly, one of the least important factors in my analysis of Precious Metals is the “dollar index.” And when Greece inevitably sets off the chain of events that destroys the Euro, said “dollar index” will be even less relevant – that is, if it still exists.

Don’t get me wrong, I could double or triple this “rebuttal list” if I had the time and space to critique all 12-pages of this “must not read” report. However, suffice to say, my primary complaint is that not only does it ignore the most important factor in the Precious Metals market – i.e., Cartel price suppression; but discusses gold as it were some ordinary commodity, with essentially no utility or investment merit. And this, whilst speaking of the dollar as if it can only get stronger throughout time; particularly during times of crisis, let alone, crises of the Federal Reserve’s own making.

In the final analysis, only you can determine how to protect your assets from what’s coming; which, by the way, both Harry Dent and the Miles Franklin Blog agree upon. As for me, I’ll stick with the only assets to have proven themselves throughout history; let alone, at prices below both the marginal cost of production and long-term industry-sustaining cost.


Courtesy of Courtesy of

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

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