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Gold and Deflation: Readers Weigh InRick Ackerman
Deflation has never occurred on a global scale, nor in a financial environment such as currently exists one in which fundamentally worthless currencies serve not only as legal tender, but as the world's chief store of value. Under the circumstances, the prospect of deflation raises some tricky questions for gold bugs, most of whom were attracted to bullion because of their deep distrust of paper money. Their skepticism is hardly unfounded, since a hundred clever accountants toiling day and night for a decade could not produce even a shred of proof that the world's money piled to the height of Everest would be worth significantly more than the paper it's printed on. Given this empirically unassailable fact, one can hardly fault gold bugs for hoarding metal against the day when the world's fiat currencies cease to be accepted as money. When that day arrives, perhaps ten years hence, those who have hoarded gold coins, bags of junk silver and ingots will awaken to find themselves richer, even, than many of the paper billionaires whose names populate Forbes magazine's annual list. That's the theory, at least. But how do we reconcile it with the historical knowledge that deflation should cause all assets, even gold, to fall in value relative to cash? And if the price of gold should soar to $10,000 per ounce, as some gurus have predicted, why should we expect a destitute world to abide a concentration of wealth and buying power in the hands of a few crazies who thought to stockpile doubloons? Small wonder that gold bugs are anxious about the contents of their safe deposit boxes. And anxious they are likely to remain, at least until a debt deflation that I view as inevitable forces some hard choices about what constitutes money in an asset-depleted world. Gold as Insurance With this introduction, I present to you more comments from Rick's Picks subscribers concerning the investment status of gold in these all-too-interesting times. I will leave the response up to you, dear readers, since I've already said enough. First up today is Kevin Bryant: "If we suffer the kind of economic calamity that increasingly seems in the cards, whether deflation precedes hyperinflation or vice versa, it's hard for me to imagine that we wouldn't see a significant and lasting spike in the gold price. Although asset values may be wiped out on an unprecedented scale, where will those left with money put it? It certainly won't be in dollars for reasons you've pointed out. Euros, yen, yuan, the pound? These currencies are inextricably linked in the big picture. I could see some going into Swissies, Aussies, and Canadian dollars, but because, as you point out, you are likely to at least maintain your purchasing power with gold, it would have to attract more than its share of investors hungry for insurance. Forget about outsized gains. Funny thing is, there are only a couple of chairs at this dance. It'll be like the residents of Houston trying to leave on the I-10 at the same time. No, it's looking more and more like a spike to me." 'Hard Cash'? From Jeremy Pace: Excellent article. I caught it on 321gold. If I might respond to something you wrote: Bottom line: In a deflationary collapse, only hard cash - something few of us possess in any quantity - will provide a safe haven. "I believe the reason we do not possess hard cash (paper dollars or specie?) is because of the three generations of governmental influence to render cash obsolete in favor of personal checks, cashier's checks, and credit cards - the illusionary forms of money. It is now illegal (or allows law enforcement to make flying leaps of fact-free conclusions) to travel with more than $10,000 in cash. News stories about residential search warrants broadcast the amount of free cash found upon the premises. And U.S. Customs law puts a close eye on anyone traveling with a large amount of transferable wealth leaving or entering our borders. "But I would like to ask you to further define 'hard cash'. Do you mean dollar bills - which have been reduced to $100 denominations from the previous $1,000, in an effort to restrict their use? Or modern coin, which now changes its look every few years in an effort to make people buy collectors' series? Or the pre-1964 silver standard specie, which might hold value in a hyperinflation, but not in a severe deflation? [Note: In this context, hard cash means any form of currency that would be accepted today in exchange for goods and services. RA] Brazil's Experience From Khalif David: "You have made some very valid points that in the recent past have been borne out by experience. In 1990, Brazil was in a hyperinflationary mess. In March of that year a newly elected president took office and immediately announced the freezing of all bank and saving deposits except for a nominal amount that could be withdrawn from each account. "The effects were something to behold! As you point out, everything collapsed simply because there was no readily available cash to pay for anything, even a currency that was losing 3% a day to inflation became extremely valuable. Gold, dollars and stocks all meant nothing -- just cash. The supermarket owners were the most sought-after people around because they were receiving cash. One could buy the blocked deposits at a 50% discount because so many people needed cash for urgent necessities. "Since nothing was done about the underlying causes of inflation, it soon returned and the merry-go-round started again. But the stock market kept falling for another year and PE's of 1.0 or less were quite common. "The lesson I learned was that in the short term you need huge gobs of cash, but in the space of weeks the hard currencies and gold reasserted themselves. But Brazil was different. We had no bond market to speak of and all government debt was churned in one day repo's or indexed to inflation, indices that were usually rigged. The asset of choice was land and property, not that they were liquid, just that it was more difficult to steal! But on a 3 year view, the stocks came off best." On Monday, we will resume this discussion with yet more interesting letters from readers. *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman *** 321gold Inc |
