On August 11, the price of gold collapsed: down over $35. So did the price of silver, platinum, and palladium. A lot of people are asking why. On my site's page on gold's daily price, I make available a five-day chart of gold's price. On that page, you will find my commentary on gold. Beginning on the 18th of March, and posted on the 19th, I wrote that I believed gold had probably entered a bear market. That call looked as though it was way too premature, since gold's intra-day high had been $1,037 on March 17. In the very early morning of March 17, I ran an article on my site on how to short gold to protect your position in coins. Here is what I posted on my gold price page. If you have visited my page, you should recall this. I think gold has entered a bear market. I posted this article on March 19, 2008: The offsetting factor is fear of war with Iran. See my Department: War With Iran. Just for the historical record, here is what I wrote on March 18 and published on March 19. Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to. If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28–30). I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be? . . . One day's move should not be regarded as a definitive turning point – not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow. Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan's bubbles: the commodity bubble. I think the bubble is about to end. But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold. I believe in the Austrian School's theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises' theory of the boom-bust cycle in order to hold such a position. Gold is ideal for Mises' inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn't any. If you wonder how I came to this conclusion, read my mini-book, Mises on Money. I was convinced on March 18 that the recession caused by the Federal Reserve's relatively tight money policy would lead to a fall in the price of all commodities, especially the precious metals. I believed that the commodity market was the last of the bubble markets. The real estate market popped in 2006, and had continued downward. I was convinced that the last market of Greenspan's bubble economy was the commodities market. Investors go from market to market, trying to find the next market that is going to boom. This chase proves to be futile. They chase bubble markets; they get killed by bubble markets. I was convinced that commodities were going to fall, and that this was the end of the road for the bubble markets. In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran. That would be disastrous internationally, and it will push the price of oil and the precious metals much higher. It was the threat of war with Iran that kept gold above $900 – not monetary policy, not the fundamentals of the market, not technical indicators, and not any of the other meaningless statistical indicators that are used by defenders of a bubble market to persuade investors that the market is anything except a bubble market. You will no doubt see lots of reports on this or that indicator that shows that the correction in gold and silver and platinum and palladium and copper and zinc and all the other metals is temporary. I don't think it is temporary. I still worry about war in Iran. I don't think people should ever discount too heavily the idiocy of governments regarding war. The absolute stupidity of the President of Georgia in launching a military invasion of the Russian-dominated province of South Ossetia last Friday is indicative of what rulers do without counting the cost of their actions. This is normal. So, while the fall in prices of oil and the precious metals has given me some confidence that neither United States nor the State of Israel will launch a pre-emptory strike against Iran in the near future, I am certainly not willing to bet all of my money, including gold, on this assumption. Nevertheless, I have been public in my warning since the middle of March that I believed that the bull market in gold and silver has ended. If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward. RECESSIONS AND GOLD Why is this the case? Because the recession is real. If the rest of the world moves into recession, as I think is likely, the demand for commodities will fall. The value of commodities has nothing to do with value in themselves. They are valuable only because the consumer goods that commodities are used to produce are expected to rise in price. Manufacturers believe that there will be increasing future demand by consumers for these goods. Therefore, they enter the market for raw commodities, land, and labor, and they bid against each other in an attempt to secure ownership of these producer goods. Some people speak of the intrinsic value of gold. Whenever you hear anyone say this, you can know for sure that you are dealing with someone who knows nothing about economic theory. There is no such thing as intrinsic value. There is only imputed value. There can be historic value, but this historic value is based on long periods of time in which people have imputed value to a particular good or service. There is no intrinsic value, meaning a fixed market price, for any commodity. Commodities are valuable only in so far as the output of commodities is valuable. This was a fundamental insight of the founder of Austrian School economics, Carl Menger. In a recession, consumer demand falls. The goods and services that had been demanded before are perceived as too expensive by consumers now facing a recession. They reallocate their money to the most important uses in their household budgets. They buy the most important goods and services, and they skip the purchase of marginal goods and services. So, the tools of production that are used to produce the marginal goods suffer a price decline. Demand for these producer goods falls. Manufacturers look to the future, and they conclude that consumers will be buying far fewer of the items produced by the particular producer goods. Producers also look at the price of commodities that are used to produce these goods, and they decide to purchase fewer of these commodities. So, the price of commodities falls. Gold and silver have been sold as hedges against price inflation, and sellers also have told customers that the Federal Reserve is dramatically increasing the money supply. For almost two years, I have said that the Federal Reserve is not dramatically increasing the money supply. It is barely increasing the money supply at all. This is why I predicted there would be a recession. This is why I predicted that consumer prices would not rise at anything like the increase in the supply of M3 and MZM. I looked at the adjusted monetary base, and I concluded that the Federal Reserve was only increasing the monetary base by about 2% per annum. I looked at M1, and I concluded that the money supply was barely climbing at all. This led me to predict that consumer prices would slow down, and that commodity prices would fall as a result of a shift in consumer spending. I post links to these statistics on my site's page, Federal Reserve Charts. This is why, on March 18, I decided that the bull run in gold and silver had ended. Only war with Iran was likely to push gold back above $1,000 per ounce in 2008. I am not optimistic that gold would go above $1000 in 2009, because I expect the real estate market will continue its downward fall, and I think that will continue at least in the 2010, and it may continue into 2011. Therefore, I think this recession will be much longer than the average recession after World War II of 11 months. Gold does not do well in most recessions. Furthermore, neither does silver. I realize that you have read a lot of reports from a lot of people that gold and silver were inevitably heading higher. Well, they are not inevitably heading higher. A CONSPIRACY? If you read that there is a conspiracy to force down the price of gold and silver, then you had better also be provided with a clear explanation for why this conspiracy has forced down the price of commodities across the board. It is not just gold and silver that have fallen in price. It is the entire Commodity Research Bureau index. The CRB index is the standard index of commodities, and it has been falling since the beginning of July. If conspirators are doing this, they surely are very powerful and very rich conspirators. Writing in The Daily Reckoning on August 8, Dan Denning reproduced the CRB chart for the year. It is clear from this chart that the collapse is across the boards. This is no conspiracy. This is Austrian School economic theory in action. I think we are entering a recession that will be known as the worst postwar recession since 1981. If China's central bank slows down its 20% per annum increase in M1, as I expect that it will after the Olympics, then we can expect this recession to be international. If that is the case, then this recession could last longer, and actually be worse, in the 1980–81 recession. It may not be worse in the United States, but it will be worse worldwide. The United States has gotten rid of a great deal of manufacturing employment since 1981. We are more of a service-based economy. This means that we are less threatened by decreases in consumer demand. Consumer demand usually focuses on decreased purchases of goods rather than services. This is why recessions have such a negative effect on commodity prices. I think we are in only the preliminary stages of a housing recession. Because we have not had falling housing prices nationally since the Great Depression, it is legitimate to call this a housing depression. This is not happening only in the United States. It is taking place all over the world. It is especially taking place in English-speaking nations. So, the supposed engine of economic growth, internationally and nationally, the housing market, has gone off the tracks. It is not going to go back on the tracks in 2009. I will regard as nearly miraculous if it goes back on the tracks in 2010. So, we had better be getting ready for a major recession that lasts for over a year, and could conceivably last for two years. This is why I do not expect any additional bubble markets over the next two years. We have seen that the real estate market was a bubble market. It is in steady fall, and there is no indication that it is about to reverse. When a bubble market pops, he does not recover soon. Think of the NASDAQ stock index. It peaked in March of 2000 and 5040. It is now around 2400. That was a classic bubble market, and has never recovered. Those who thought it would recover find themselves down over 50% in terms of their equity, and down over 20% more in terms of purchasing power of the dollar. Nevertheless, they hung on. They thought the market would recover. They were wrong. CONCLUSION The Federal Reserve System can and will eventually inflate. I monitor the adjusted monetary base. I post it on my website. It has moved up sharply in the last month. This does not mean that this is guaranteed to be a new trend, but it does indicate that the Federal Reserve System has inflated more rapidly than it has in over five years. So, I do expect long-term price inflation. But I do not expect this to take place over the next year or two. I think price inflation will slow. It is conceivable that we could get price deflation for a few months, depending on the severity of the recession. The housing market is sufficient, in and of itself, to keep the American economy in a recession mode for the next year. I expect to be a buyer of houses sometime over the next three years. But this recession should not be underestimated with respect to commodity prices. You should not expect the commodity bubble to reappear in the next 12 months, unless there is war with Iran. Given what happened on Friday, August 8, do not discount the possibility of war with Iran. Governments do stupid things. On Sunday evening, August 10, "60 Minutes" ran its earlier show on the possibility that the Israeli Air Force is prepared to attack Iran. The first broadcast was scary enough. The second was even more scary.
On my site's page on gold's daily price, I make available a five-day chart of gold's price. On that page, you will find my commentary on gold. Beginning on the 18th of March, and posted on the 19th, I wrote that I believed gold had probably entered a bear market. That call looked as though it was way too premature, since gold's intra-day high had been $1,037 on March 17. In the very early morning of March 17, I ran an article on my site on how to short gold to protect your position in coins.
Here is what I posted on my gold price page. If you have visited my page, you should recall this.
I think gold has entered a bear market. I posted this article on March 19, 2008: The offsetting factor is fear of war with Iran. See my Department: War With Iran.
The offsetting factor is fear of war with Iran. See my Department: War With Iran.
Just for the historical record, here is what I wrote on March 18 and published on March 19.
Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to. If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28–30). I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be? . . . One day's move should not be regarded as a definitive turning point – not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow. Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan's bubbles: the commodity bubble. I think the bubble is about to end. But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold. I believe in the Austrian School's theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises' theory of the boom-bust cycle in order to hold such a position. Gold is ideal for Mises' inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn't any.
If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28–30).
I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be? . . .
One day's move should not be regarded as a definitive turning point – not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow.
Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan's bubbles: the commodity bubble. I think the bubble is about to end.
But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold.
I believe in the Austrian School's theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises' theory of the boom-bust cycle in order to hold such a position.
Gold is ideal for Mises' inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn't any.
If you wonder how I came to this conclusion, read my mini-book, Mises on Money.
I was convinced on March 18 that the recession caused by the Federal Reserve's relatively tight money policy would lead to a fall in the price of all commodities, especially the precious metals. I believed that the commodity market was the last of the bubble markets. The real estate market popped in 2006, and had continued downward. I was convinced that the last market of Greenspan's bubble economy was the commodities market.
Investors go from market to market, trying to find the next market that is going to boom. This chase proves to be futile. They chase bubble markets; they get killed by bubble markets. I was convinced that commodities were going to fall, and that this was the end of the road for the bubble markets.
In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran. That would be disastrous internationally, and it will push the price of oil and the precious metals much higher. It was the threat of war with Iran that kept gold above $900 – not monetary policy, not the fundamentals of the market, not technical indicators, and not any of the other meaningless statistical indicators that are used by defenders of a bubble market to persuade investors that the market is anything except a bubble market.
You will no doubt see lots of reports on this or that indicator that shows that the correction in gold and silver and platinum and palladium and copper and zinc and all the other metals is temporary. I don't think it is temporary.
I still worry about war in Iran. I don't think people should ever discount too heavily the idiocy of governments regarding war. The absolute stupidity of the President of Georgia in launching a military invasion of the Russian-dominated province of South Ossetia last Friday is indicative of what rulers do without counting the cost of their actions. This is normal. So, while the fall in prices of oil and the precious metals has given me some confidence that neither United States nor the State of Israel will launch a pre-emptory strike against Iran in the near future, I am certainly not willing to bet all of my money, including gold, on this assumption.
Nevertheless, I have been public in my warning since the middle of March that I believed that the bull market in gold and silver has ended. If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward.
RECESSIONS AND GOLD
Why is this the case? Because the recession is real. If the rest of the world moves into recession, as I think is likely, the demand for commodities will fall. The value of commodities has nothing to do with value in themselves. They are valuable only because the consumer goods that commodities are used to produce are expected to rise in price. Manufacturers believe that there will be increasing future demand by consumers for these goods. Therefore, they enter the market for raw commodities, land, and labor, and they bid against each other in an attempt to secure ownership of these producer goods.
Some people speak of the intrinsic value of gold. Whenever you hear anyone say this, you can know for sure that you are dealing with someone who knows nothing about economic theory. There is no such thing as intrinsic value. There is only imputed value. There can be historic value, but this historic value is based on long periods of time in which people have imputed value to a particular good or service. There is no intrinsic value, meaning a fixed market price, for any commodity. Commodities are valuable only in so far as the output of commodities is valuable. This was a fundamental insight of the founder of Austrian School economics, Carl Menger.
In a recession, consumer demand falls. The goods and services that had been demanded before are perceived as too expensive by consumers now facing a recession. They reallocate their money to the most important uses in their household budgets. They buy the most important goods and services, and they skip the purchase of marginal goods and services. So, the tools of production that are used to produce the marginal goods suffer a price decline. Demand for these producer goods falls.
Manufacturers look to the future, and they conclude that consumers will be buying far fewer of the items produced by the particular producer goods. Producers also look at the price of commodities that are used to produce these goods, and they decide to purchase fewer of these commodities. So, the price of commodities falls.
Gold and silver have been sold as hedges against price inflation, and sellers also have told customers that the Federal Reserve is dramatically increasing the money supply. For almost two years, I have said that the Federal Reserve is not dramatically increasing the money supply. It is barely increasing the money supply at all. This is why I predicted there would be a recession. This is why I predicted that consumer prices would not rise at anything like the increase in the supply of M3 and MZM.
I looked at the adjusted monetary base, and I concluded that the Federal Reserve was only increasing the monetary base by about 2% per annum. I looked at M1, and I concluded that the money supply was barely climbing at all. This led me to predict that consumer prices would slow down, and that commodity prices would fall as a result of a shift in consumer spending.
I post links to these statistics on my site's page, Federal Reserve Charts. This is why, on March 18, I decided that the bull run in gold and silver had ended. Only war with Iran was likely to push gold back above $1,000 per ounce in 2008. I am not optimistic that gold would go above $1000 in 2009, because I expect the real estate market will continue its downward fall, and I think that will continue at least in the 2010, and it may continue into 2011. Therefore, I think this recession will be much longer than the average recession after World War II of 11 months. Gold does not do well in most recessions. Furthermore, neither does silver.
I realize that you have read a lot of reports from a lot of people that gold and silver were inevitably heading higher. Well, they are not inevitably heading higher.
A CONSPIRACY?
If you read that there is a conspiracy to force down the price of gold and silver, then you had better also be provided with a clear explanation for why this conspiracy has forced down the price of commodities across the board. It is not just gold and silver that have fallen in price.
It is the entire Commodity Research Bureau index. The CRB index is the standard index of commodities, and it has been falling since the beginning of July. If conspirators are doing this, they surely are very powerful and very rich conspirators. Writing in The Daily Reckoning on August 8, Dan Denning reproduced the CRB chart for the year. It is clear from this chart that the collapse is across the boards.
This is no conspiracy. This is Austrian School economic theory in action.
I think we are entering a recession that will be known as the worst postwar recession since 1981. If China's central bank slows down its 20% per annum increase in M1, as I expect that it will after the Olympics, then we can expect this recession to be international. If that is the case, then this recession could last longer, and actually be worse, in the 1980–81 recession. It may not be worse in the United States, but it will be worse worldwide. The United States has gotten rid of a great deal of manufacturing employment since 1981. We are more of a service-based economy. This means that we are less threatened by decreases in consumer demand. Consumer demand usually focuses on decreased purchases of goods rather than services. This is why recessions have such a negative effect on commodity prices.
I think we are in only the preliminary stages of a housing recession. Because we have not had falling housing prices nationally since the Great Depression, it is legitimate to call this a housing depression. This is not happening only in the United States. It is taking place all over the world. It is especially taking place in English-speaking nations. So, the supposed engine of economic growth, internationally and nationally, the housing market, has gone off the tracks. It is not going to go back on the tracks in 2009. I will regard as nearly miraculous if it goes back on the tracks in 2010. So, we had better be getting ready for a major recession that lasts for over a year, and could conceivably last for two years.
This is why I do not expect any additional bubble markets over the next two years. We have seen that the real estate market was a bubble market. It is in steady fall, and there is no indication that it is about to reverse.
When a bubble market pops, he does not recover soon. Think of the NASDAQ stock index. It peaked in March of 2000 and 5040. It is now around 2400. That was a classic bubble market, and has never recovered. Those who thought it would recover find themselves down over 50% in terms of their equity, and down over 20% more in terms of purchasing power of the dollar. Nevertheless, they hung on. They thought the market would recover. They were wrong.
CONCLUSION
The Federal Reserve System can and will eventually inflate. I monitor the adjusted monetary base. I post it on my website. It has moved up sharply in the last month. This does not mean that this is guaranteed to be a new trend, but it does indicate that the Federal Reserve System has inflated more rapidly than it has in over five years. So, I do expect long-term price inflation. But I do not expect this to take place over the next year or two. I think price inflation will slow. It is conceivable that we could get price deflation for a few months, depending on the severity of the recession.
The housing market is sufficient, in and of itself, to keep the American economy in a recession mode for the next year. I expect to be a buyer of houses sometime over the next three years. But this recession should not be underestimated with respect to commodity prices. You should not expect the commodity bubble to reappear in the next 12 months, unless there is war with Iran.
Given what happened on Friday, August 8, do not discount the possibility of war with Iran. Governments do stupid things. On Sunday evening, August 10, "60 Minutes" ran its earlier show on the possibility that the Israeli Air Force is prepared to attack Iran. The first broadcast was scary enough. The second was even more scary.
Source.
Shows how out of things I am. I had no idea about this.
-Jon
To darkness I condemn you...
Great article. I, myself, have long thought we were in a gigantic asset bubble. There has been unabated bullishness when it came to precious metals and extreme bearishness when it came to the dollar. It is true that the principles of supply and demand aren't a very good determinate of pricing when it comes to speculative assets such as stocks, metals, and real estate. Lot of the pricing is emotion driven - fear and greed. You can't make an armchair argument and say that drilling for more oil will automatically bring prices down when futures traders are bidding frantically on it to go up. And it is true that the banks and financial institutions have been mostly responsible for the increase in money supply. The fed doesn't really ramp up their printing presses to create more inflation contrary to what people think. Their main job is to facilitate credit by encouraging more people to borrow. There is a lot of misunderstandings about the fed and their role in inflation. And a lot of that myth is not just perpetuated by the media, but even on the Mises site itself. George Reisman does a great job of clearing up the misunderstanding about inflation and deflation. You should read his article on that subject matter published in March.
Although I believe we can enter a period of sustained deflation I would still advocate holding on to some sort of gold for safekeeping and also in our uncertain system of fiat money.
Yeah, Reisman is great too.
You pointed out that because the US economy is more service threatened, that the situation shouldn't be as bad as in the past. However, while the employment situation shouldn't be as bad, wages will be either stagnant or even falling. So people will be employed, but be taking home less. Also service based economy recovers more slowly than a manufacturing based one.
I believe the economic fallout will be worse than most peopl ever imagined. Much of the wealth generated by the American economy over the last couple of decades has been speculation driven instead of savings and investment driven. Speculative booms always end in a bad bust.
Just so you know, the article is by Gary North, not me.
It's gone down so I have more of a chance to buy, being ever so poor.
The article makes a few assumptions about things, not all of which are set in stone:
Jon Irenicus:In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran.
I think this is a bit naive. Gold (which is one commodity) is generally priced according to people's expectactions of future inflation. If people think inflation will be a problem in the future then gold goes up in price and vice versa. Which leads me to the next point (the fundamental assumption that the author makes, which is no doubt the reason he's ignoring inflation as a "second" possible reason why the commodities market could come back):
Jon Irenicus:In a recession, consumer demand falls.
True. However if production falls more than consumer demand then prices will go up anyway... So thinking only about demand will only give you half the story. Some manufacturers will cut back production because they see demand slipping. Other manufacturers will cut back production because they're broke! If, for example, GM were to go broke and stop making cars then it's entirely possible you could see the price of cars go up in the states. The same is true of any number of companies in other industries that might fail in the wake of the inlationary boom that was going on from 2000 to 2005.
I could go on and on but basically what it boils down to is the assumption that recessions are deflationary. However this quite simply is not the case. See the following post of mine for more on that (I asked this question a while back and eventually tracked down some answers myself): http://mises.org/Community/forums/p/1553/20666.aspx#20666
Clearly the issue is more complicated that most commentators let on - the vast majority of them rolling with the popular assumption that recessions are deflationary (never even considering the alternative realities) and very few of them explaining how or why they can be otherwise (as they so often are).
If we see deflation then yes, commodities will likely sink in price. If we see inflation then they'll likely keep going up. The chances (historicially) are about 50/50 - so I'm holding about half cash and half gold and silver myself (as a hedge against both possible eventualities - not looking to make massive profits, merely to save about half my skin).
>> Gold (which is one commodity) is generally priced according to people's expectactions of future inflation.
While there may be some truth to that, commodities can also be priced to people's exaggerated expectations of future inflation. That's why we sometimes see markets all of a sudden collapse (like in 1980), even though we didn't suddenly experience deflation.
bullfrog: >> Gold (which is one commodity) is generally priced according to people's expectactions of future inflation. While there may be some truth to that, commodities can also be priced to people's exaggerated expectations of future inflation. That's why we sometimes see markets all of a sudden collapse (like in 1980), even though we didn't suddenly experience deflation.
Indeed. Just as they can under estimate future inflation. They don't always get it right, as individuals or as a group. None the less, the price is based on inflation expectations. My point was that almost everyone appears to be expecting deflation in the years ahead because they seem to believe that recessions and deflation are inseperable. However, looking at historical evidence this appears to be rather a misplaced belief - only about half of the recessions in the last century were accompanied by deflation.
North is very wrong on many points.
The most important is, because of his faulty money definition, he thinks the fed is deflating right now. On the contrary, FED has never inflated as much as it is these days.
You dont need to look at some M numbers for this. It is basic logic.
The US government spends more than ever. Budget deficit is at an all time high. With the war and bail outs on top of regular welfare state.
There are only three ways to cover a budeget deficit.
One is increase in nominal taxes. Which isnt happening.
The other is borrowing from the pool of savings. Which, because of increased demand, would increase the interest rate. And this isnt happening either.
And the final way is monetazing debt by inflating the money supply. In other words government is borrowing more but not from the available pool of savings, but from the pool of newly created inflationary extra money.
If you look at gold only, gold is both a commodity used in industry and a investment tool.
This inflation will definetaly increses the commodity price of gold steadily (the effect of steady inflation is not a buble but steady price increase), but investment part would fluctuate especially in short term because of the actions of traders and central banks.
But these fluctuations can only be temporary because fundementals tells us that, dollars supply are and will be increasing but the gold supply will not be. At least not as fast as dollars.
So this is a very good opportunity to buy commodities including gold, silver and oil.
Ktibuk, you are absolutely right. North did a huge mistake and still hasn't realized it or is simply going along with it. The Fed is inflating like there is no tomorrow and, while we are waiting for datas from the ECB, there's little doubt they are following suit. But he was right when he was saying that the commodity bubble was starting to deflate: look at oil prices for example. Without any significative variation in supply and demand it lost about 30% of its value over a three weeks period. Is it ALL down to supply and demand? Or perhaps do speculation and price-fixing (both involving LOTS of government intervention) really exist? Gold, silver and platinum are no different. Prices were driven to stratosphere by enormous quantities of cheap credit coming crushing in. Now the market is trying to find a precarious balance, but rest assured that our good mates in charge will see to that.
Like starting a war with Russia, that's just what we need in this moment. Wait until Monday and you'll see that every commodity (including gold and silver) will start to skyrocket again. Oil is already going that way.
Yes, it's time for the Dr Goebbels show!
Kakugo,
Oil and other commodity prices will rise again. These are technical corrections.
There will be ups and downs but the destination is inevitable.
Also whoever thinks that "in recession demand falls" doesn't know what stagflation is.
If the FED keeps inflating like it is doing, demand can never fall.
On the contrary because in an inflationary enviroment people would want to get rid of money as soon as possible, demand would skyrocket. People would even demand and buy things they wouldnt need, because those stockable things keep their value unlike the paper money.
Demand falls only during deflationary recession. And deflationary recession only occurs when the FED lets the banks fail, thus deflating the previously inflated money supply. And I dont mean the bank fails that are happening wight now. I am talking about real fails, when most people can not get their money at all and write it off.
Thinking that the Federal Reserve will keep up the rates of monetary expansion that we have now is extremely naive. Bernanke is a monetarist of sorts and I don't think he'll be afriad to raise rates when inflation gets out of hand. It is very hard for monetary policy itself to create simultaneous inflation and recession, because there are inherent contractionary forces in an economy when all the loans being issued by the CB during the boom have to be repaid. The Fed would have to lower rates significantly to be able to "paper over" not only the contraction but to even create significant amounts of inflation to prevent commodities from crashing.
There's no doubt in my mind that commodities are on shaky ground right now. You might be able to still make a buck with gold or silver, but don't be that person who bought gold right before the 80s bust.
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krazy kaju:It is very hard for monetary policy itself to create simultaneous inflation and recession, because there are inherent contractionary forces in an economy
I keep saying it, but no body is listening... look at the numbers: St Louis Fed CPI Graph St Louis Fed PPI Graph
50% of all recessions are inflationary - yes, I'll say it again: inflationary.
So once again, the mantra that keeps getting hammered in public - recessions are deflationary - is completely misguided. No small number of economists, investors and members of the public are currently selling commodities because they believe that recessions are deflationary when the reality is that this quite simply is not true - it's a wive's tale.
Straw Man Alert: I never said that most recessions are deflationary. There is, however, a difference between what we call a recession and what we call a stagflation. Commodity prices always fall during normal recessions, they are not like normal consumer goods. There has been only one time in American history that we experienced a stagflation - in the 70s. Our economy most likely won't face a stagflation unless a bad combination of heavy regulation and high rates of monetary expansion lead us into the same mess.
Just look at the data (warning different time periods):
krazy kaju:Straw Man Alert: I never said that most recessions are deflationary.
Straw man? Your post indicated (and I quoted it) that you felt inflation in recessions was very difficult and my post merely pointed to some empirical data implying, quite to the contrary, that recessions are very often (indeed about 50% of the time) accompanied by inflation. Where exactly is the straw man that you're referring to?
Do you see the logical contradiction in your post? Let me point it out to you:
Your post indicated (and I quoted it) that you felt inflation in recessions was very difficult and my post merely pointed to some empirical data implying, quite to the contrary, that recessions are very often (indeed about 50% of the time) accompanied by inflation.
As you say, my post indicated that for inflation to happen in a recession is very difficult, to which you reply that 50% of the time recessions are inflationary. Where do I say that the majority of recessions are deflationary? As you can see, your statement clearly presents a straw man: that I believe that most recessions are not inflationary when I never said anything of the sort.
Furthermore, you entirely misrepresented my views. If read in the context of this entire thread and the rest of my post, the half-sentence you nit-picked out of my thread indicates that inflation in commodities like gold and silver is hard to achieve during a recession, not that inflation in consumer goods is hard to achieve.
My post in general dealt with stagflation, yet you completely misrepresent what was said by immediately saying that many recessions are inflationary. Inflationary recessions and stagflations are two separate things yet you manage to confound them. You further complicate the ordeal by setting me up with a straw man and singling out half a sentence out of an entire post.
krazy kaju:Where do I say that the majority of recessions are deflationary?
Where did I ever suggest you did?
My reply makes perfect sense to what you did say - that inflation in recessions is diffcult - I pointed to some statistics to show you that this is not the case... that it's easy - in fact it happens 50% of the time. So no, no straw man. I understood your original post and my reply was logical and consistent. I don't like logical fallacies (they annoy me) and I don't generally try to base my arguments on them - so I'm sorry if you misunderstood what I was trying to say.
In any case, all of this is irrelevant pedantic bickering. You saw the data I showed you right? And you can see that recessions aren't always deflationary right? So you can see that it might actually be possible and even easy for the central bank to inflate, even during a recession... all they have to do is create more loans, which can be done by changing policy (for example, by letting banks swap dodgy assets out for good ones etc. to avoid any credit contraction). As I say, whether this happens this time or not remains to be seen - certainly Bernake has shown himself to be more concerned about growth than inflation so far - we'll see how he plays out the second half though.
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