-- Posted Friday, 9 January 2009 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Thursday, January 8, 2009
“Phenomenally accurate forecasts”
Hey, inflationists! If any of you can explain how we’ll recognize the return of inflation, or perhaps the beginnings of a hyperinflation, I’m all ears. Click here and drop me a line, because I’d really like to know. Will hyperinflation steal up on us in the form of a doubling, then quadrupling, then octupling, of the minimum wage? Will homes in my neighborhood that have been sitting on the market since 2007 start to attract bidders waving freshly banded packets of $10,000 bills in our faces? Can we expect to shell out $100,000 at some point for a cart of groceries? Will it cost $500 to ride the subway?
If I hear from anyone whose inflationary logic is both detailed and persuasive, I’ll reprint it here. But let me tell you up front that I’m skeptical -- so skeptical, in fact, that I doubt that we would see hyperinflation even if the Federal Government were to pay off the mortgage of each and every American, or declare a one-year moratorium on income taxes. I will explain why in a commentary that is scheduled to go out over the weekend. I also intend to make clear why only those who possess physical gold are likely to come out ahead, relatively speaking, as deflation crushes all asset values.
Meanwhile, as promised, here’s a letter I received from an erstwhile gold bug who is no longer certain about bullion’s future. The author is Myron P, a Canadian who like myself was once a floor trader. He writes as follows:
Let's see if I can get these thoughts across in something less than a thesis.
Overall question: Which way for Gold? I think up, then down hard.
Second question: What does anyone with cash do to protect themselves? Sit tight, don't run around.
My personal debate -- started about 13 years ago, when the US populace was already spending their way into oblivion -- was whether we would have Inflation or Deflation.
There was no answer at the time, and truly, I feel there isn't a clear path even today
It's the same road: The end result would/will be determined by which fork in the road the government would choose at the last moment. Would the government force the population pay off those debts, thereby stifling the economy for a decade, or simply devalue money to make it easier to erase those fun-time debts ?
Gold felt good and safe back then ( 1996-97). But didn't it go down the whole time I was on the floor? Down to, eventually…what? $250?
Banks Tapped Out
That was yesterday, this is today.
Today, well, we've got no money - reminds me of that old Burger King commercial "Where's the Beef ?" Jaw-bone all you want, there's just no visible money. People don't have any, companies don't have any, even the banks don't have any liquid stuff to throw around. And that is something I've never seen. During my business life, perhaps they wouldn't give it to you, but the banks always had the money. Even in the 1980s crisis the majors seemed healthier than they are at this moment.
This is how today's world looks to me: the American masses, up to their necks in mortgage and other debt; house values under water; their nominal owners about to start losing their jobs in growing numbers. Retirees are fully invested in mutual funds for the yield, but fully 40 percent of that wealth has evaporated. We will not likely see them doing any significant new investing for the foreseeable future, so great have their losses been.
Crushing Rates to Zero
As for Big Money, the banks are tottering and can only run to T-Bills for safety, thereby crushing short rates down to zero. I'll predict that if this continues for some time, the zero rate will slowly start extending outward, with a flattening yield curve.
And finally, the Doomsayers, rushing into Gold and other commodities as a safe-haven.
And here is the main point of my thoughts: We will all be affected, and we will all eventually get to the same place: cash poor.
The masses, young and retired alike, have been devastated and are immobilized. The government, already holding a vast amount of mortgages, might institute a national relief program, providing artificially low mortgage rates on the condition that you forfeit the low rate if you sell your home. There might be a few benefits to this type of program, but I digress. Either way, it is only relief, not a cure for these sadly positioned people
A Severe Trim
If banks are compelled to lend, one day interest rates will pop up to a more normal level.
Name any level you wish, but if rates going out five and ten years have been compressed to nothing, and then “street” rates pop, zero rate bonds obviously will cause the holders severe pain; and the big money, in trying to find safe-haven, will also get a severe trim.
Then we have those smart doomsayers who ran for cover into gold, oil, and whatever.
Can they get through this crisis unscathed? Forget conspiracy stuff and manipulation theories for a moment. Just simply, look at the overall picture. Everyone is hurt, money and wealth has evaporated. Do you really feel that doomsayers, sitting on Gold, will be the lone winners? Will this be allowed either by the "powers that be," or simply "Nature's forces." (Pick which power makes you feel better.)
It's easy to see where most commodities have gone, except for Gold. Hovering as if weightless, seems to be what one would expect given the status of Gold. But for how long ? My guess is that fear will drive the price of Gold high. I have no idea how high, nor for how long -- but high, as fear feeds upon itself.
All Will Be Cash-Poor
Then, when the willing money has invested, the big question arises: What good is gold when Cash is King? ( And, oh yes, I truly believe in the historic nature of Gold; but let's look at a bigger picture for a minute.) I believe that as interest in Gold then deflates, this group will also join the party - becoming cash/wealth-poor. And with that happening, all significant groups have been equally affected and balance will painfully be restored.
So, where to hide at this moment? Sometimes doing absolutely nothing is the best policy. It happens to be the least liked action today, and as traders we have seen that before, and know what it often means. Governments have finally started to support the banks and at least here in Canada, they have the appearance of strength and stability, and actually give some rate of return higher than zero. Sometimes just standing still is the best defense.
Cash is King today. And until and unless the governments start literally handing bucketsful of the stuff directly into common folks’ hands, Cash should remain King – and will remain scarce. That being the case, for how long can Gold play out its endgame before it comes down, and hard?
***
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-- Posted Friday, 9 January 2009 | Digg This Article | Source: GoldSeek.com
