With the massive monetary expansion experienced in recent months and the promise for unprecedented levels of money and credit supply increase in coming months, the United States Federal Reserve looks on paper to be sending America straight into hyperinflation. Germany's post-World War I Weimar Republic, post-World War II Hungary, 2001 Argentina, and present day Zimbabwe are all analogous examples of massive debt monetization, which all led to hyperinflationary disaster. Never before has the entire world's economy been linked to one nation's, however, as is the case today with the United States. In a case of economic mutually assured destruction, foreign creditor nations and their central banks can't afford to spark a run on the US Dollar, because it would kill their own export-based economies, as well as devalue their debt repayments and foreign exchange reserves. But the United States has been financing consumption through debt for decades and has resorted to monetary expansion to finance its debt and deficit spending, which is only going to increase with Barack Obama's infrastructure and social programs. The Troubled Assets Relief Program (TARP) itself amounts to $700B, all of which will essentially be "printed." Foreign demand for US debt is all but gone, as creditor nations are now attempting to unwind their USD positions. Huge creditor nations like China and Iran were net sellers of US Treasuries in recent months, attesting to the weakening of the American debt bubble. So where's all this excess liquidity go? The answer is gold, and it is the only way to prevent the hyperinflationary scenarios referenced above from materializing in the United States. The Fed has been on a money printing binge of unprecedented proportions, but has been able to thus far "trap" the excess liquidity from reaching the consumer level, which is what causes price inflation. It started a massive foreign currency sale this summer through the Exchange Stabilization Fund (ESF) that led to a supply increase of Euros and suppression of dollar usage. It has been liquifying troubled banks by issuing them T-bills financed through monetization in exchange for toxic assets by utilizing reverse repurchase agreements. And it has used the recent deleveraging and commodity collapse (partially caused by credit defaults in many of the overleveraged institutions that were supporting the commodity bull) to supply the temporary demand for US Dollars and feeding its own foreign exchange reserves. But the excess liquidity thus far is trapped in time-sensitive and manipulated instruments now, and without a demand for American debt, it has to go somewhere. As T-bills expire and the stock market descends further, actual currency is going to be released out of sequestration into the economy. The Fed cannot allow the market to breach below its November lows, unless it wants widespread insolvency in insurers and banks, which are legally required to halt operations in the event of insolvency. I've heard estimates of 7500 and 8000 in the Dow as being minimum support levels that, if broken for an extended time, would lead to economic collapse in America as financials would all go under. To prevent this and to finance Obama's deficit spending, actual dollars will have to be injected into the system and they will be. Weakness in the dollar causes strength in gold, which is something the Fed (through America's banks) has been suppressing for years. COMEX shorts dominate this suppression of gold prices, but this act will be discontinued to prevent economic collapse. Allowing gold's price to rise to current fair levels (and then rise further to represent gold's rising fundamentals) will soak up much of the excess liquidity, preventing hyperinflationary price increases in consumer goods. Gold reached backwardation this month, signifying the big gold market manipulators are abandoning their short positions. Ben Bernanke is a proponent of dollar devaluation against gold and is a staunch advocate of Frank D. Roosevelt's decision to do so in 1934 during the Great Depression. Dollar devaluation is one of the government's most prized tools, as it allows debts to be paid back in devalued nominal terms, transferring risk and purchasing power destruction to American taxpayers, who have no clue what is going on. Inflation is a tax on the people and with a fiat currency, a power-limitless Fed can (and has) tax the hell out of the American people. The dollar, and fiat currency as a whole, faces collapse now, however, as the artificial wealth created and used in the past few decades is now showing its nature as being just that-- artificial. The global monetary system will have to return to some sort of precious metal backing, directly or indirectly, and surging gold prices is essential for this to occur. Rising gold prices represents the excess liquidity being soaked up and also causes nominal equity values to rise without dramatic rises in consumer goods. Gold has little utility outside of store of value, which is why its price hasn't collapsed at nearly the same rate other commodities, like oil and natural gas, have. As crude and steel suffered demand destruction from consumers losing wealth quickly, gold was barely touched at all and in fact probably would have shown even more strength hadn't it been for the aforementioned manipulations of the Fed and the global deleveraging of financial institutions. Technically, gold appears poised to break out of its countertrend down move in its primary bull, leading to much higher prices soon. It broke out of its 50DMA on strong volume recently and is approaching a 200DMA breakout. With backwardation occuring this month, all indicators point to gold surging in the coming months. Gold and gold miner stocks are also looking quite bullish. I recommend Royal Gold (RGLD), which recently broke out of a great long-term base, as well as El Dorado Gold (EGO), Goldcorp (GG), Iamgold Corp (IAG), Barrick Gold (ABX), Randgold Resources (GOLD), Jaguar Mining (JAG), Anglogold Ashanti (AU), Agnico-Eagle Mines (AEM), and Newpont Mining (NEM) for the coming year. Also, look into buying the gold ETF (GLD) and the Ultrashort 30-year Treasury Bond ETF (TBT) as the US debt bubble collapses and debt monetization starts to show up in the Fed's balance sheets. I do suggest buying lots of bullion, however, as stock market returns are in nominal dollar-denominated terms. The American total credit market debt to GDP ratio is at unprecedented highs, well above 350%, and this with ridiculously manipulated inflation numbers artificially deflated through hedonics. The government deficit could top $2 trillion next year. And the Fed is going to print money to pay for it all. The only way to prevent hyperinflation is to return to some sold of hard asset-backed monetary system and to allow gold's price to rise dramatically. My prediction: gold breaks $2000/oz in 2009 and $10,000/oz by 2012.
We have near record deflation right now. The credit bubble propped up all prices with unsustainable debt driven demand and now prices for many things are crashing back down. Gold may be no different. If people are losing their jobs and have less money, are they going to go out and buy gold with what few dollars they have left? I doubt it. More likely they will be taking their jewlery to the pawn shop and hocking their gold so that they can buy food and pay the rent. It is not relevant i think to speculate about impending hyperinflation when we are currenty having record deflation. Maybe when prices stop falling and the economy starts improving and we still see the GVT spending tons of extra money then that would be a huge concern. GVT actions certainly are inflationary, but I think they are inflationary from a much lower base that the economy is currently crashing toward. If it wasn't for the credit bubble, perhaps normal prices of things would be say DOW 6000, Crude $29, Gold $500, home prices 1998 levels, milk $2.00...ECT ECT. The GVT is actually trying to inflate these prices so that we don't crash down as far. This is a good plan I think because if prices do keep crashing down to what may be the true levels, this will be a terrible depression. So while gvt policy may be creating hyperinflation, it may be hyperinflation on what true prices are that we are CRASHING down to and not current spot prices which are still too high and falling daily in this post credit bust world.
Deflation is contraction of monetary supply... we are experiencing a record expansion of monetary supply. Prices are going down through demand destruction as the economy contracts, but the Fed has already printed much more than the equity destruction in financials in recent months to "bail" them out. All of this excess liquidity has to go somewhere and it will go into gold. The wealth that has been destroyed in the past months has been more than made up with the "wealth" that the Fed has created in that same timeframe.
Money supply is tough to measure. I think it is safe to say that the wealth/money destroyed is in excess of the amounts of the bailouts/gvt spending by a large large margin. I think gvt is just trying to offset the destruction. Certainly the end result will be inflation and higher prices than otherwise we would have. But like i said, prices are now falling fast. It could be that gvt action just causes prices to not fall as far as they otherwise would. If you are however right, i doubt its a 2009 story. Hyperinflation probably more like a 2011-2020 story. Debts probably won't come due for many years to come.
look at the Fed's balance sheet. liabilities are much much greater than the equity destruction incurred recently. and that's before debt monetization. theres your money supply right there. i don't think we will see hyperinflation and the reason for that is i think much of the excess liquidity will be soaked up by gold, which is already manipulted to ridiculously low artificial levels.
that says it all. bull market in gold in 2009 ? you must be delusional ... but then again, nothing seems to stop gold bugs, let alone common sense ...
Silver has more industrial use than gold (thus will face headwinds from demand destruction) but is also a good investment. CDE doesn't look like the best stock to pick if you want to find some precious metal companies, check out the ones I recommended in the article.
Gold supply/demand is strongly tied to fiat currency stability. Consumer wealth destruction does not translate into demand destruction of gold, like it does for oil. Gold's demand is from banks and speculators and people who want to preserve capital. Not from ordinary consumers. Gold would go up in deflation or inflation because of the structural fundamental weakness in the USD. simple as that.