Gold Value Increases During Extreme Deflation (or Inflation)

March 11, 2007

I will explain why it does not matter whether the central banks lead us to inflation or deflation, because it is too late to maintain any balance in the business cycle, and defaults are now an unavoidable event in the not so distant future, which will cause gold to skyrocket in value.

I explained in my previous two articles, "How Derivatives Compete With Gold" and "Derivatives Are Competing With Gold!", that "interest rates" are set by the free market (of individual decisions) if on a 100% gold legal tender standard, because no one can control the supply of gold money.

Fiat paper/electronic money empowers a central bank to create/destroy (and thus control the supply of) legal tender money and thus the "interest rates". When "interest rates" are set higher than the free market (of individual decisions) would, then supply of legal tender money is in deflation. When "interest rates" are set lower than the free market would, then supply of legal tender money is in inflation.

Again, I reiterate that "interest rate" is the "opportunity cost" on investment, so don't confuse this with Fed Funds or even bond rates. Perhaps a reasonable proxy for "interest rate" is long-term bond rates minus money supply inflation, but money supply inflation is not accurately reported and bond rates are being manipulated by CPI lies, direct central bank intervention (buying/selling) via Repo contracts, and other factors. Thus we have no accurate measure of "interest rate" when on a fiat money standard, which is precisely the reason that (the deception of) derivates can compete with gold.

My previous two articles implied the fact that gold can gain no value when it is the legal tender money (100% gold standard), because the free market of "interest rates" is inherently in competitive balance, as thus the legal tender gold money supply is nearly constant (no centralized manipulative force able to create/destroy money) with the free market of individuals deciding the necessary return for investing their money.

When on fiat money standard and perceived "interest rates" are set higher than free market, either by deflation of fiat money supply or by deceptive reporting of CPI, real GDP, and M3, then the value of gold decreases. As explained by Dr. Fekete (see my previous articles), this is because a (deceptive) higher return can be obtained in fiat derivatives from the higher than free market "interest rates". The deception is that the risks of defaults, or the swing of the business cycle, may not be properly factored, especially if the underlying data on CPI (and thus real GDP) and money supply inflation are deceptively reported or not reported:

Thus many fear that gold will decrease in value when deflation comes in our current economy. Not true! When derivates have been allowed to grow to such as an extreme (see my prior article "Derivatives Are Competing With Gold!" for discussion of how extreme), then any significant deflationary period will result in catastrophic defaults. This means most banks, most brokerage accounts, most futures accounts, most businesses, etc.. will all fail and lose all value. When every method of fiat storage is failing, then the desire to store fiat fails, then gold skyrockets.

Not convinced? With defaults on that extreme scale (and there can be no smaller scale based on the extreme quantity of derivatives relative to everything else, again see my prior article "Derivatives Are Competing With Gold!"), then massive fear erupts, due to survival instincts and fighting over scarce production. Fear drives demand for gold. For example, in 1929, gold went from $20.63 in 1929 to $34.69 in 1934, and even that 50% increase was too low a price set by government decree. We know for a fact that $34.69 was too low, because foreigners traded all their dollars for all our gold at that price until 1971 (officially most of our gold is gone, and for the remaining small official amount, Fort Knox hasn't allowed public audit in decades). And that price was with the supply of gold drastically increased by the 1933 confiscation, and the entire US demand for gold suddenly outlawed in 1933 (US citizens could not own gold, while foreigners were allowed to buy the confiscated gold at low price). So you can imagine how high the price would have skyrocketed, had the demand and supply of gold remained in the free market.

But of course the Fed will try to delay defaults, thus they will print as many dollars as necessary to prop up FDIC, Fannie Mae, etc., but remember that at some point every balloon must pop, so the extreme defaults deflation is inevitable and only becomes more extreme with more time to grow.

During the interim time to extreme deflation defaults, while the Fed is accelerating money supply inflation to keep all derivative boats afloat, then the inhibition of the growth rate of value of gold (and inversely the growth rate of derivatives) is dependent on the success of deception. As deception dies, and more and more people realize that the "interest rates" on fiat derivatives are inevitably negative (due to inevitable defaults), then gold will increase in value. Unfortunately, it seems the masses do not try to figure any of this out, they just wait until they see everyone else doing something, then they do it. So deception tends to work very well, until very near the end.

In 2005, the bankruptcy laws were changed so the US citizens (and probably similar laws being enacted in other countries as well, given that fiat fractional reserve central banking exists in every country on earth now) are not allowed to escape their debts if their income is above median thresholds. The threshold is afaik adjusted by CPI. Given that CPI is running about 2% per year, while derivatives and gold are growing at 20 - 30% per year, then the threshold line is falling in real value.

When the dollar fails due to extreme defaults, the government will be pressured to offer a solution to the mayhem. It might offer reinflation fiats, but these will all fail (as they did in Weimer Germany). Since eventually there will be no confidence in fiats, government will need to offer something new, and probably something with a gold backing. The gold ETFs may or may not be a solution as extreme defaults may wipe out most brokerage accounts, and the ETFs may fail also due their derivative gold reserve (paper gold, not physical gold, see the prospectus for proof). The long-planned Amero may be offered with gold (that the US gave the IMF) backed SDRs from the IMF backing the Amero.

So with the bankruptcy law redesigned in 2005 to trap those above the median income, do you really think the banks are going to design a transition to the Amero that favors giving debtors a way out? And I expect the coming depression will be blamed on those who hoard gold with derivatives (e.g. Yen carry trade speculators), just as the 1929 depression was erroneously blamed on the gold standard, and thus I see by government decree one (1) dollar of debt converted to one (1) Amero of debt, with Amero convertible at perhaps one (1) oz of gold. The populace will be appeased by punishing those criminal (Enron precedent) gold hoarding speculators, who used fixed interest rate debt to wreck the economy. The little guy with debt, won't suffer any worse, as he will have no gold. And the little guy will favor bringing gold back into the economy at a favorable price.

So now imagine the gold investor who is taking out a 2nd mortgage to buy gold. He ends up too rich to escape bankruptcy, unable to find a buyer for his house, and unable to pay the debt without losing all his gold. Fiats are debt servitude futures contracts. Caveat emptor.

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Shelby Moore is sole creator or contributor to numerous commercial software, e.g. (2006-), TurboJet, CoolPage (1998-). WordUp [archived] (1986-1989), Corel Painter (1993-95), EOS PhotoModeler, etc..

Due primarily to the California Gold Rush, San Francisco’s population exploded from 1,000 to 100,000 in only two years.

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