Inflation or Deflation - Gold or Dollar

[colinkites2000]

Hello All,

First time poster here. Love the Dr.'s message. Economically confused. Perhaps some of you more knowledgeable can point me in the right direction with answers and perhaps some further reading.

1. I have read and heard many people say that the USD is approaching a crash and gold will skyrocket upon it's crash. This is primarily due to inflation (which there has been a lot of as of late as far as I can see) and also due to other countries selling their government dollars off as they see the US economy failing. The Dr. has more or less supported these sentiments saying that "We are having a dollar crisis" and speaking of the "destruction of the dollar" being more of a disaster than taking our lumps now (regarding bailouts)

2. Other sources such as ElliotWave say that the dollar is in a huge uptrend and will continue that way for some time while gold declines towards targets of about $600. This is largely deflation-speak and is bearish on gold.

At what point does inflation turn to deflation? (if that even happens) What are all your thoughts on who is correct here... or am I missing something that signifies they are both on the same page.

Best,
C.

[nate895]

Whoever is saying that gold is going down over the long run is a moron. It might go down a bit before the ultimate collapse, but the dollar will eventually collapse and be pretty much worthless, and gold and silver will become the default currency. All these bailouts are increasing the rate of inflation, and eventually the government will print one too many dollars, and loaves of bread will be worth tens of thousands (or an extremely small amount of gold or silver).

[AJ Antimony]

Our government, through the Federal Reserve, perpetuates inflation by creating money out of thin air. When does this happen? Well, Congress has, let's say, a $3 trillion budget. They use this money on anything and everything. Throughout the year, Congress also spends money off the budget. For example, lots (all?) of military spending has been paid off budget so the Congress can avoid spending rules. All of this as we hear produces a record budget deficit of, let's say, $500 billion. And yet at the same time, we never hear of Congress running out of money. Somehow they spend $3.5 trillion with only $3 trillion revenue. That extra money is either borrowed, or more easily simply created out of thin air by the central bank, the Fed.

The theory after this is easy. More dollar bills created means the dollar is less scarce which means it's value decrease. As its value goes down, the dollar cost of everything goes up to make up for the weaker dollar.

So, seeing as the government perpetually overspends on the military and now on Wall Street bailouts, inflation sooner or later will come back in full force and then some. Of course in the short term which is most unpredictable, yeah sure the dollar might gain some strength, but long term will bring nothing but massive inflation.

As far as other countries "dumping dollars" goes, I can't help you there because even I don't fully understand that part yet! :)

[colinkites2000]

ElliotWave is supposedly pretty good. Main points from a recent newsletter;

- Their bearish stance is the minority
- More convinced than ever of downside potential
- 25% decline since March peak with most recent leg down through Aug, marking the biggest drop since March 1980.
- Significant parallels between this period because that was just months off a major top .
- Gold making good progr. towards target of $600.
- Despite decline gold demand increasing in areas and US Mint had to suspend sales temporarily...

I want gold to win also but when there is a depression and contraction of money supply, doesn't the dollar go UP in value and likely the opposite for gold?

[nate895]

ElliotWave is supposedly pretty good. Main points from a recent newsletter;

- Their bearish stance is the minority
- More convinced than ever of downside potential
- 25% decline since March peak with most recent leg down through Aug, marking the biggest drop since March 1980.
- Significant parallels between this period because that was just months off a major top .
- Gold making good progr. towards target of $600.
- Despite decline gold demand increasing in areas and US Mint had to suspend sales temporarily...

I want gold to win also but when there is a depression and contraction of money supply, doesn't the dollar go UP in value and likely the opposite for gold?

It would, but the Federal Reserve is printing money like mad to prevent a depression, it will fail, and when it does, so will the dollar.

[StilesBC]

People need to understand what the dollar is.

"The Dollar" is the inverse value of Euros (57%), Pounds, Loonies and Yen (about 10% each) and some other currencies.

So the dollar can rise because all of those other currencies are just as bad. If the euro disintigrates (very possible), the dollar will skyrocket. But that doesn't mean gold will go down. Gold can rise along with the value of the dollar for those reasons. It's not either or.

American assets (real estate, equities, debt securities) are overvalued. They need to fall. That entails deflation. There is no way around this. The overall supply of money and credit will decrease no matter how many bailouts or how much 'money printing' is done.

Gold will rise because people don't trust the value of ANY currency. And they don't trust the banks to hold their savings. They want to keep it themselves or keep it in a safe deposit box. It is impractical to do this with cash, so people will do it with gold.

[nate895]

People need to understand what the dollar is.

"The Dollar" is the inverse value of Euros (57%), Pounds, Loonies and Yen (about 10% each) and some other currencies.

So the dollar can rise because all of those other currencies are just as bad. If the euro disintigrates (very possible), the dollar will skyrocket. But that doesn't mean gold will go down. Gold can rise along with the value of the dollar for those reasons. It's not either or.

American assets (real estate, equities, debt securities) are overvalued. They need to fall. That entails deflation. There is no way around this. The overall supply of money and credit will decrease no matter how many bailouts or how much 'money printing' is done.

Gold will rise because people don't trust the value of ANY currency. And they don't trust the banks to hold their savings. They want to keep it themselves or keep it in a safe deposit box. It is impractical to do this with cash, so people will do it with gold.

I think it is a race to see which currency fails first. If it is the dollar, the entire world economy is screwed, as several countries use the dollar, or tie their currency to the dollar, and it is reserve currency in the rest of the world. Europe and the United States will collapse at some point because both live on borrowed money. The USA and EU are basically living off of their good name at this point, and to some extent the world owes it to us for saving their ass in several wars, but we are running out of that time.

[Brian4Liberty]

LOL! I almost started a thread with the same question. It's a tough question in the short run. Here's a few data points I see, some long, some short, some more or less important. Not only that, what's good for the government or wall street is rarely good for the average Joe.:

- housing decline - deflationary.
- gov deficit spending - inflationary.
- increased money supply and bailouts - inflationary.
- cheaper (than China) labor supply almost exhausted - inflationary.
- central banks bullion sales must slow eventually - gold friendly.
- non US central banks may be even more corrupt than US - dollar friendly.
- lingering international opinion that US dollar is "safer" - dollar friendly.
- increased food/energy costs - inflationary
- popping of oil/commodity bubble - deflationary
- health care costs - inflationary.

[colinkites2000]

Great info - thanks for all your replies. This is helping!

Now, In 1980 Paul Volckker raised the rates and the result was a quick delflation burst when commodities, financial assets as well as gold and silver all went down at once. This is what many are predicting now but on a larger scale. I'm not 100% convinced on gold in the medium term yet. Does anyone know of it's performance in other deflationary periods?

[llepard]

This is a really tough call.

Because we are on the razors edge and could fall into either.

Fact: Gold is 7 years into a bull market. Commodity bull markets last 20 years.

I read Elliott too. Brilliant stuff. There is downside risk to gold to 600-650. At that level I will be 100% in gold.

The unknown is the government response. Although it is not that unknown given what they did this week.

They will monetize or print and that will be wildly inflationary. Will there be a transmission mechanism (eg: a way to get the money to the people) I do not know. If not, deflation.

But, gold wins in inflation and deflation. Inflation because it protects purchasing power and is fixed in supply. Deflation because it is not someone else's liability and therefore there is a "fear" demand that emerges for it so the demand curve shifts and price goes up. Gold performed well in the depression. (mining stocks as a proxy, price was fixed)

Without a doubt gold is the best investment in this climate. That may change, but the change is some time away.
\
PS: Another Elliott guy who thinks gold has bottomed here is Robert McHugh. I take his service. It is excellent. The best technical analysis out there today. I have made significant money off of his insights on price, timing, etc. Really good you should check it out.

[FreeMarketEconomy]

I think the inflation of the USD can be good and bad depending on what you focus on.

If there is inflation it would be better for US exports because it would be cheaper to purchase from the US, thus it would create more jobs for Americans.

If US exports increase it mean a very good potential for a US trade surplus. On top of that there would be a trade surplus against China because the Yuan has a basket peg on the USD.

In addition the relative value of the US debt would be reduced.


Regarding the gold standard people may argue that the US economy would be sluggish relative to the rest of the world because of the lack of leverage that helps economic growth.

Also, on top of the great sudden rise in the price of gold to equal the aggregate outstanding USDs, you would have to control the mining and use of gold in developing technologies.


These are just a few things to consider. You can argue both sides, but regardless the debates are very interesting.

[Pete]

I used to play the market some years ago and did well, but got my ass blistered shorting oil service stocks in the 80s and my wife made me quit. Lately, I have become interested again because a friend asked for advice concerning her portfolio, and I have come into a little money and am thinking about what to do with it.

WRT the stock market, I don't think the big primary bull market that started in 1982 is necessarily done yet. My reasons for saying so:

Interest rates are still low.
Neither inflation or deflation are recognized as big concerns yet.
There are a lot of foreign dollar holders who may be satisfied with stocks in exchange for their dollars as a representation of 'hard assets'..
The DJIA just touched a major long-term trend line with heavy volume on upticks, likely indicating a turning point for the positive.

http://bigcharts.marketwatch.com/charts/big.chart?symb=djia&compidx=aaaaa%3A0&ma=0&maval=9&uf=0&lf=1&lf2=0&lf3=0&type=2&size=2&state=8&sid=1643&style=320&time=20&freq=2&nosettings=1&rand=8532&mocktick=1&rand=6900

By the same token, gold charts look to me like gold prices are in a correction but the fundamental trend is positive. I am looking for gold to test 750 again, which it may penetrate and go as low as 550-650, depending on when it bottoms. I think that domestic deflation could be a concern with tight credit (the Fed seeking to redeem itself) and continued massive imports.

http://www.kitco.com/LFgif/au75-pres.gif

This is just a scenario that I would not stake my life on, but would consider before going into gold with both feet.

[AJ Antimony]

People need to understand what the dollar is.

"The Dollar" is the inverse value of Euros (57%), Pounds, Loonies and Yen (about 10% each) and some other currencies.

So the dollar can rise because all of those other currencies are just as bad. If the euro disintigrates (very possible), the dollar will skyrocket. But that doesn't mean gold will go down. Gold can rise along with the value of the dollar for those reasons. It's not either or.

American assets (real estate, equities, debt securities) are overvalued. They need to fall. That entails deflation. There is no way around this. The overall supply of money and credit will decrease no matter how many bailouts or how much 'money printing' is done.

Gold will rise because people don't trust the value of ANY currency. And they don't trust the banks to hold their savings. They want to keep it themselves or keep it in a safe deposit box. It is impractical to do this with cash, so people will do it with gold.

Ah, good point(s)

[AJ Antimony]

Pete, calculate inflation with M3 and then see if it's a 'major concern' or not

[FreeMarketEconomy]

Also, since this is an election year everything is emphasized tenfold.