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Fool's Gold (Part 1)
Monday, July 6, 2009, by Stathis
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“…the U.S. might continue its trend towards inflation merely due to continued high oil prices and weakness of the dollar. And only after some disaster such as a Fannie Mae blowup might deflation appear. Regardless of the magnitude of any economic correction, the next decade or two more will most certainly be characterized by extreme inflation. A severe catastrophe might usher in a deflationary period as an after-effect, but only after inflation has caused significant damage. Thus, the possibility of deflation will most likely be determined by the sequence of events, as well as the extent of the economic correction, while high inflation is a virtual certainty.”  

 

 

Source: America’s Financial Apocalypse: How to Profit from the Next Great Depression (2006)

 

 

SOUND FAMILIAR? In fact, we experienced a short deflationary period after the MBS market blew up. Some say we are still experiencing deflation, but they’re wrong. Inflation is alive and well. And I expect it to become a major problem in a few years.

Note that I didn’t use the term hyperinflation because it’s not going to happen in our lifetime. Anyone who thinks otherwise simply isn’t thinking straight. 

Now, I want to warn you in advance that what you’re about to read could cause a temper tantrum, depending on who you’ve listened to and what you’ve invested in. But don’t worry, because after you read this article, you’ll know the truth about gold. And it should help you better position your investments more wisely; that is, as long as you’re willing to accept and act upon the truth instead of remaining in denial.  

After patiently waiting for more than two decades, the gold bugs finally have something to be excited about. The gold bull market is in its eighth year, having soared by 400%. Gold propaganda is everywhere. It seems like everyone is talking about gold, right? Everyone wants to sell you gold, but should you buy it? Keep in mind that this is precisely the kind of activity that signals the later stages of all asset bubbles.

 

The overwhelmingly predominant claim floating out in the RETAIL investor marketplace (i.e. sheep land) is that gold is a great hedge against inflation.

Much of this propaganda hasn’t come from Wall Street, but rather from various financial websites featuring amateur investors, gold dealers, and perma-bears. These individuals claim you can preserve your principal during inflation and even grow it if you buy gold.

Most of them (as well as the perma-bull market hacks) have also claimed that we entered a secular bear market in 2008.

Virtually all of them also insist that hyperinflation is also coming.

Due to the seemingly endless printing of money from the Treasury and record-low interest rates, there is no doubt inflation will present a very difficult challenge in the years to come, but hyperinflation isn’t going to happen in the U.S; not in our life time anyway.

Upon being flooded daily by the propaganda from the gold bugs, the response from the sheep has been predictable:

“Wow. Gold does well during inflation and we are going to have hyperinflation! That means I can get rich if I buy gold!”

WRONG.

As you shall see, I’m going to demonstrate that these gold bugs, perma-bears and others who bombard the Internet are preaching a misleading story about gold and inflation. Most of them are simply clueless.

Others are intentionally spreading myths as an attempt to manipulate the gold and currency markets. The amateurs represent much of the clueless segment, as do many of the gold bugs.

As far as the claims that we entered a secular bear market in 2008 - Wrong again folks. The fact is that we have been in a secular bear market since 2001. I explained this in America’s Financial Apocalypse, and many times since then. 

ANYONE who claims hyperinflation is a 100% certainty (like Faber, Schiff and the other media clowns have) is a complete fool, or else they’re trying to manipulate the dollar and gold markets so their investment strategies will pan out. Along with the gold-inflation myth, they’ll continue to preach the hyperinflation mantra so as to make you feel compelled to buy gold.

Perhaps they’re trying to create a self-fulfilling prophecy of gold rising during inflation. Sure it will rise during inflation; if everyone believes this myth and buys it! That’s the ONLY force that would cause it to rise and persist at high prices during inflation.

But this large group of extremists and their followers would be fools to think that sheep move markets. Institutions move markets. And the big institutions realize that gold doesn’t do well during inflation. It only does well due to deflation and other relatively short-term crises.

Let me reiterate the main point. Gold is a hedge against DEFLATION, not inflation.

But it’s also a place investors and even consumers rush to during a crisis; basically any large-scale crisis, such as a large-scale war, an oil crisis, or geopolitical turmoil. It just so happens that during these wide-reaching crises, inflation is often one of the macroeconomic consequences. Consequently, most people have wrongly concluded that gold is a direct hedge against inflation without understanding the fine details.

Most investors understand that gold represents a safe haven during uncertain times. Fortunately, uncertainty is often temporary. That’s why the price of gold moves up and down rapidly and over short time frames.

So if you’re not trading gold’s volatility, you’re really missing out on the true action. What do you think the big institutions are doing? Do you think they’re buying and holding gold, or trading the volatility swings? Have a look at the chart and decide for yourself.

 
 
 
 
 

I provided an explanation why the price of gold increases during deflation, and often during inflation in America’s Financial Apocalypse.

Let’s have a look at another excerpt from this book…

“While there have been some instances when rising gold has mirrored periods of increasing inflation, much of this behavior has been attributable to factors other than inflation itself. Rising gold prices usually result from a deflationary economy not an inflationary one. During a prolonged deflationary environment, GDP is reduced, leading to a decline in the purchase power parity of the currency. Therefore, buying gold during a deflationary environment provides a nice hedge against relative changes in foreign currencies. 

It so happens that many investors also shift into a gold hedge during inflation, which only reduces the buying power domestically. However, since the dollar is the global unit of currency, inflation also acts to diminish its purchase power parity. And because gold is not linked to any currencies, this might explain why gold is the investment choice for many who are worried about deflation or inflation.  

While the ‘70s and early ‘80s showed a correlation between inflation and gold prices, in my opinion there were many other factors that led to this phenomenon. Not only was the price of oil spiking, but there were numerous global issues causing many to flock to gold as a secure investment. 

Whether gold, inflation, and high oil prices will demonstrate such a correlation again will be dependent upon the overall health of the global economy. If however, oil continues its surge (a likely possibility), gold in fact may mirror the inflation escalation we are seeing and will continue to see over the next several years.   

You may have noticed back in the 2001 to 2004 period when deflation was evident, gold made a major upward move. After a correction in prices in early 2004, gold is again on the rise, but this time it’s not due to deflation; nor is it due to inflation per se.

Currently, the rise in gold is due to the rise in commodity prices, the weak dollar, and the weakness of the U.S. monetary policy. Combined, these elements have an inflationary effect. While significant inflation is certainly present in the economy, it is neither due to nor a direct consequence of the price of gold. Rather, rising energy and healthcare costs, and a decline in total wage compensation are causing inflation. Although many economic experts claim that rising oil prices cannot in itself create inflation, they are absolutely wrong. 

Finally, consider the possibility that the Fed may eventually create even more inflation in order to pay off much of its debt. This would artificially increase the GDP and earnings growth of corporate America. There are some who contend that the government has caused high inflation in the past to pay down debt, and if true, that would serve as a precedent. As final support for this possibility, Bernanke is considered to be an expert in the economics of inflation. Perhaps Washington feels he’ll be able to raise and lower inflation as needed. But they may be in for a rude awakening.”

 

Source: America’s Financial Apocalypse: How to Profit from the Next Great Depression (2006)

 

 

The last paragraph might have stuck out in your mind. Based upon the monetary events over the past year, it appears as if the Fed may well intentionally boost inflation. 

But once again, gold is NOT a direct hedge against inflation. In fact, over a long-term horizon, gold doesn’t even keep up with inflation. I’ll demonstrate this later. For now, let’s get back to addressing the herd mentality because it’s important to understand. 

Why do so many people think gold rises during inflation? 

I call it the “CNBC effect.” When you have hundreds of so-called “experts” pumping out the same message, whether it’s about how “great” the economy is or how the Dow is headed to the moon, viewers (the sheep) will believe it. It becomes a validation by consensus by those lacking the expertise or capacity to think independently for themselves; in other words, 99.99% of the U.S. population. This mechanism of mass propaganda actually forms the basis of certain contrarian investment strategies. 

Even when these networks interview one or two guests whose views oppose the majority of the network’s programming content, viewers vote with their ears rather than their minds. Majority rules; it’s validation by consensus. And it helps create market sentiment.

If people are told the same thing over and over again, they’ll believe it. This is a rudimentary but common brainwashing technique. And it’s used extensively by the media. I call it the flooding approach. And it’s used by the media on a daily basis to sway opinion, emotions and validate news spin. The same effect is now being seen on the Internet due to the rapid growth of financial websites, as well as a spike in interest from everyday investors, searching for valuable investment guidance.

But you should not fall for this trick. The fact is that that majority is usually wrong. This is especially true during times of uncertainty. You need to filter out the noise. You need to start thinking for yourself at a level sufficient to realize who out there knows what they’re talking about. These investment professionals will have an excellent track record, but no agendas or bias. Once you identify this very rare group of individuals, you should follow what they say while ignoring the others.

But you certainly aren’t going to find them in the financial media because they’re paid off by the financial industry (in the form of advertising revenues).

Do you really think they would air real experts with no agendas or bias? If they did, viewers would be positioned ahead of the curve and Wall Street wouldn’t be able to sucker you like they always have. As a result, it is by no coincidence that most of the guys on TV are clowns, fools or stock manipulators, including their so-called “expert” guests. They help preserve the agendas of the financial networks.  This is the way the game is played so I suggest you get up to speed. The problem is that there is often a direct carry over to the Internet and print media.

Those familiar with my track record should understand why everything I say should be taken very seriously. As the facts demonstrate, I have the best track record in the world when it comes to this economic collapse. And I certainly have no agendas or bias. I get paid to be right.

I provide investment research. I don’t sell gold or securities. At the same time, I have real Wall Street experience. So it would be in your best interests to read what I write very carefully, because I’m here to tell you right now; the guys you read, see and hear about the most, are generally clueless. If you don’t believe me, you need to spend more time comparing track records. If after doing this, you don’t see the light, you’re likely to get burned over and over. 

Perhaps now you understand why I focus so much effort exposing the inner workings of the financial media.

In Part 2, I’ll illustrate why gold should never be held as a long-term investment, with one exception. Click here for Part 2.

 

 

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