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Sunday, May 30, 2010

Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong

Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". In a recent commentary entitled "Ten Things for 2010" he was at it again bashing Gold. Here is what he had to say:

We're not looking at hyperinflation folks, in my view - we're looking at a deflationary collapse…If you fear hyperinflation do not look to Gold, instead buy a small (5% of your total portfolio) position in far out of the money LEAP CALLS on the major indices, spread across them.  Why?  Because (1) the tax structure on gold is unfavorable, (2) gold has never performed well on a contemporary basis .vs. inflation and (3) you can't eat it.  If you try to get around the tax man structure you're going to get creamed; governments can and WILL prevent that from working.  My recommendation thus is to buy insurance against a hyperinflationary event using instruments that do not try to evade the formal financial structure, are levered (to get around the tax hit) and are defined risk (so as to avoid losing your ass if you're wrong.)


Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?

And the tax structure is FAR more favorable for Gold than ANYTHING else, if only you are not in the habit of bending over. Buy cash and keep your mouth shut – it’s very simple – or just move to another country where the government is not as intent on raping its citizens. I know privacy is a foreign concept in America these days, but still. All your other assets, including stock market profits, are fully open to the government and there is nothing stopping them from taxing them to the hilt. Trust me, when it all hits the fan Gold in your personal possession will be your best friend.

Which brings me to my favorite part:

gold has never performed well on a contemporary basis .vs. inflation



Poor Gold. The thing gave an instant 75% profit when Roosevelt confiscated it in 1933 and rose 24x (yes, that’s 24 TIMES) from $35 to about $850 in a space of 10 years from 1970 to 1980. And even during the past decade from 2000-2010 it has risen 5x outperforming ALL asset classes. Overall, from 1933 till date it has risen about 60x. That is, if you simply held Gold since 1933 you would be now 60 times richer, at least in nominal terms. Yet nobody remembers all that. All they remember is the lousy 20 years from 1980-2000 when the full force of the derivatives market was brought to bear upon it to suppress it’s price (well, that’s a topic for another post), as is being done even now absent which it would have easily crossed 10x (from the 2000 low) by now – which it will at some point in the future as the market cannot be suppressed forever. Indeed, the longer the suppression, the more forceful the eventual price rise as happened when the London Gold Pool collapsed during the late sixties soon after which Gold shot up 24x during the next decade. If you’re not that devoted a disciple of Karl I suggest you hang on to your Gold for a little while longer. In my humble opinion, it will outpace all gains in all other asset classes since the creation of the dollar – in not only nominal, but real purchasing power terms.

And then there was this again:

The last time I checked they didn't take 100oz bars at WalMart, but they sure do take $100 bills

And the last time I checked Karl, they weren’t taking stock certificates and bonds either. Also, there was a funny thing I noticed: there was NOTHING stopping me from getting dollar bills, euros, yen – you name it – for my Gold. In fact, everytime I sold some Gold I got even more paper tickets than the last time – which meant that I could buy even more stuff with the same amount of Gold. How surprising, no?

Well, Karl was definitely surprised:

Precious metals will not be a safe haven: Clean miss.  Gold and silver have both performed well.

And talk about reaching wrong conclusions:

Discovery that the metals market has been "polluted" to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren't gold had tendered good money for nothing.  This would be a monstrous deflationary event - after all, the definition of deflation is the destruction of money, and that's exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard.

No Karl, the bills still exist – in the bank account of whoever was paid to obtain the said Gold. It is the Gold which is discovered to be no longer existing, thus causing the apparent supply to be further reduced and spiking the price.

Karl thinks he’ll be safe watching these “fireworks” from the sidelines. Not so Karl. By not buying Gold (and holding dollars), you are smack in the middle of them. You are not simply “missing out” on some investment gain but stand to lose everything as the purchasing power of the dollar is decimated. This is why those advocating holding only paper cash as a “safe alternative” are in fact harming those who listen to them.

Now don’t get me wrong - I agree with a lot of what he says in general – he’s a good reporter (which is why I keep him on my “must read” list) - but when it comes to Gold, Karl simply doesn’t “get it”. First of all, when you talk about deflation you have to ask the question, “In terms of what?”.  Most people ala Mish, Prechter, Karl et. al. when they talk about deflation are referring to deflation in terms of the dollar, i.e. they are, in fact, “dollar-deflationists”*. One can’t really blame them since the dollar is considered by most people as “money” today and is therefore their frame of reference. But this is a critical error of perception that will prove fatal to those who hold their life’s savings in dollars when it all finally implodes.  The dollar today is just another fiat currency created at will out of thin air by bankrupt and corrupt governments and their Central Banks. It is an illusion of money, not money; which brings us to the question of:


What is money?
This is a topic which can fill an entire book, but I’ll just quote the best one I found (Mises):

In the marketability of the various commodities and services there prevail considerable differences. There are goods for which it is not difficult to find applicants ready to disburse the highest recompense which, under the given state of affairs, can possibly be obtained, or a recompense only slightly smaller. There are other goods for which it is very hard to find a customer quickly, even if the vendor is ready to be content with a compensation much smaller than he could reap if he could find another aspirant whose demand is more intense. It is these differences in the marketability of the various commodities and services which created indirect exchange. A man who at the instant cannot acquire what he wants to get for the conduct of his own household or business, or who does not yet know what kind of goods he will need in the uncertain future, comes nearer to his ultimate goal if he exchanges a less marketable good he wants to trade against a more marketable one. It may also happen that the physical properties of the merchandise he wants to give away (as, for instance, its perishability or the costs incurred by its storage or similar circumstances) impel him not to wait longer. Sometimes he may be prompted to hurry in giving away the good concerned because he is afraid of a deterioration of its market value. In all such cases he improves his own situation in acquiring a more marketable good, even if this good is not suitable to satisfy directly any of his own needs.


A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.


Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange...

(All emphasis mine)

Money was created by the markets; by humans trading goods and services amongst themselves; by the need for indirect exchange. This is one of the major misconceptions of the dollar-deflationists - that money is what the government says it is. Although Governments do their best to convince people otherwise, including putting a gun to their collective heads via legal tender laws, they cannot dictate what money is – not for long periods of time anyways – which is why whereas Gold has been money for thousands of years, you’d be hard pressed to find a fiat currency that has existed past a few decades. The present period is one such short period of mass delusion where the majority has been convinced – including, apparently, Mr. Denninger - that the colored pieces of paper being printed by various men behind the curtains is, in fact, money.

Gold is the commodity that humans chose to be “money”- the most marketable good. It didn’t happen overnight, but over thousands of years of evolution. Billions of trading decisions over centuries made by free men of their own volition – the collective wisdom – installed Gold as money. It needs no government violence to enforce as money because the force of nature that is the market chose it to be money. Indeed, it was the governments who hijacked the free-market commodity money of Gold into “backing” their various fraudulent paper money scams using fractional reserve systems. Why? Because the power to create money is the ultimate power. It is not for no reason that Mayer Amschel Rothschild said:

“Give me control of a nation's money and I care not who makes her laws.”

And why do we know Gold is still money today? It’s simple – Gold has the highest stocks to flow ratio of any commodity i.e. its total above ground stockpile is very large compared to its annual production which is NOT the case for other commodities. The reason for this is that while other commodities are primarily mined for consumption, Gold is not consumed but hoarded. Its primary function is that of a store of value – a wealth reserve. Why do you think the Central Banks keep Gold on their balance sheet even today? Right. Even the Gold jewellery demand in countries like India is, in fact, investment demand in disguise – hidden firmly behind veils of religion and culture to protect their real wealth from the depredations of various rulers and governments that have pillaged her over the many thousands of years of her existence.

Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.

Gold IS Money – not the dollar, not ANY fiat currency. Period.

As the king of banksters J.P. Morgan himself testified before the Pujo Committee in 1913:

“Gold is money and nothing else”.

The Fiat Money Scam

Throughout history no fiat currency has survived – ever. There is a reason for it. Paper money is inherently a scam – a scheme to loot the people who actually produce the goods and services in the economy. Just because it is legalized and its perpetrators hold fancy government titles does not mean it is not a fraud. The issuer can create unlimited pieces of paper – or computer bits today – at essentially no cost and use them to appropriate real goods and services in the economy. So whereas you and I have to actually do real work to procure it, the printers of the currency can basically print whatever they need. This is why there is a constant inflation of money supply under a fiat money regime as has been the case since the Federal Reserve was established in the US in 1913, as constant theft requires constant creation of new money. The evidence of this inflation is the annihilation of the dollar’s purchasing power since then:

The Dollar's Purchasing Power Since the Creation of the Federal Reserve in 1913

This is why we have legal tender laws making the unconstitutional Federal Reserve Notes legal tender with the monopoly of the private banking cartel (i.e. the Federal Reserve) enforced by the courts enabling the banks and the government to essentially enslave the populace. This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price. Indeed, America today is the very antithesis of what its founders intended.

The fraudulent money system today is the source of all the rottenness. The various scams in progress today - the entrenched corruption - can be all be traced back to it. The rot is at the very top of the pyramid from which the fountain of fiat money emanates. It is indeed telling that the two World Wars occurred right after creation of the Federal Reserve. Further, no amount of prosecution will fix the system because the prosecutors themselves have been corrupted. As Ayn Rand said:

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.”

It is too lucrative a scam to be given up voluntarily by those owning the printing press while the going is still good. It is like expecting a thief to stop stealing while not only being immune from any sort of legal prosecution, but actually having the power to create laws. The system cannot be fixed - the only way this will stop is a collapse of the existing system so that a new one can be built – and we are in the middle of it right now.

Deflation in Terms of Gold, Hyperinflation in Terms of the Dollar

By its very nature, due to economic control being concentrated in a few hands and fraudulent creation of money out of thin air, the fiat money system creates massive misallocations of capital and resources throughout the economy. The economy under a fiat money system is no different than a centrally planned one, such as the Soviet Union.  Moreover, since the entire world is on a fiat money standard today – with the various fiat currencies themselves being “backed” by the fiat dollar - misallocations of capital have occurred throughout the world resulting in malinvestments. These misallocations are both material and human, as exemplified by the skyrocketing unemployment rate. The malinvestments now need to be liquidated i.e. converted to the most liquid form – “the most marketable good” or money - so that the capital can be reallocated to more productive uses. Loans are called in as they can no longer be serviced. This results in deflation, i.e. rising demand for money in relation to everything else, and consequently falling prices and increasing purchasing power of money. Moreover, economic uncertainty means that more and more people want to hold “the most marketable good” i.e. money thus further increasing the demand for money.

Now normally – since a lot of debt-money is destroyed in the process and there is a rising demand for money - this would lead to a rising dollar (in terms of purchasing power, not the meaningless DXY), but that would mean that the whole “theft-via-inflation” scam would fall apart. The government can’t tax a rising purchasing power! They simply CANNOT allow deflation in a fiat money regime as it would defeat its very purpose – that of allowing them to appropriate resources from the rest of the economy. This would threaten their very existence.  This is why holes created on the banks’ balance sheets by defaulting loans – which would normally create deflation - are being eagerly filled by the Central Banks. This is why the Fed is now simply printing money out of thin air – both overtly and covertly, with the derivatives market being cleverly used to absorb the excess money creation (so you were wondering why the derivatives monster is increasing exponentially in size?) - to fund the government’s operations as there is not enough money in the market to lend to the government. Hiding under esoteric nonsense terms like “quantitative easing” does not change the fact that it is simply creating money via ledger entries and outright STEALING.

Whether they “allow” it or not deflation WILL take place – not in terms of dollars, but in terms of Gold. It’s simply forces of nature – the market – at work. The dollar deflationists expect the dollar to suddenly reverse its 100 year long drop in purchasing power. Ain’t gonna happen. What the government is doing now – i.e. spending raw printed money into a contracting economy - assures us that we will end up with the hyperinflation of the dollar. The only thing they can do is prolong its demise with intermittent bouts of induced apparent “deflation” to keep the inflationary scam going a little bit longer - remember 2008? (h/t Gary). Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.  But ultimately, as more and more people realize that the government will not – indeed, cannot – stop inflating the currency into oblivion, will choose to hold the ultimate “marketable good”, i.e. Gold. This is the reason why Gold is the only asset class at new all time highs. Rest assured, even the big boys are holding Gold in their private vaults, not dollars. Is there any sense in holding something you can create at will?

Ultimately, there can only be deflation in terms of commodity based money such as Gold since it cannot be created out of thin air. Indeed, we have already been deflating in terms of Gold for the past decade. Just look at the various commodities, the stock market, real estate – pretty much anything - priced in Gold – it’s all going down:

 SPX priced in Gold (2000-2010)

As capital goes down the liquidity pyramid in search of the most marketable good, all the money derivatives – including the dollar – will collapse returning all capital to where it came from: Gold; a global reset, if you will, with only holders of Gold left standing when the dust settles:

 Exter's Liquidity Pyramid

 

You Cannot Eat Gold, But You Can’t Eat Dollars Either

That has to be one of the lamest arguments against Gold – ever. It is the sign of a closed mind. It shows that you don't know ANYTHING about human history, which is not surprising considering the sorry state of our government controlled "education system". You cannot eat FRN’s either – why not just burn them? The function of money is not to be eaten but to be used as a medium of exchange and store of wealth i.e. to get what you want to eat at an indefinite time in the future. And while with Gold you are assured of getting at least something in return in the future, whether it is an edible product or not, it is not so with dollars. Fiat money has a problem in that it lasts only as long as the government enforcing its use does. In times of economic uncertainty, such as today, when the very survival of various governments is at stake (yes, that includes the US Government) do you want to hold Gold or their worthless colored paper tickets? Gold is the only money that has outlasted empires and governments - no fiat currency has. Think about it - what will your dollars be worth when there is no government to enforce it as legal tender? Yup – zip, zilch, ZERO. And to those who say that we will not need Gold (but something else like food or guns) in such extreme circumstances, I say that empires and governments have constantly collapsed throughout history but it did not mean the end of the world. As long as you believe that human society will exist and there will be division of labor, you need money (i.e. Gold) – because:

a)    You cannot store indefinitely all your needs especially perishable items such as food.
b)    You do not know with 100% certainty what you will need in the future.
c)    You cannot produce/manufacture everything that you will need today or in the future by yourself.

Even if the government does not collapse there is nothing stopping it from devaluing the currency at will in a step function thereby instantly appropriating a vast amount of your savings, as has already happened not once but twice with the dollar since the creation of the Federal Reserve. I mean really, the facts are so obvious that you have to be either be in total and complete denial (perhaps due to having already put all your eggs in the dollar basket) or in collusion with the people promoting the paper money scam.

Gold is the currency beyond Governments. It is the most liquid form of money accepted throughout the world – the true reserve currency of the world - whereas Dollars, Yuans and Euros etc. are only guaranteed to be accepted within their own respective countries, and as long as their respective governments last. Why would you want to tie yourself down to the paper currency of a particular nation, especially in times of such turbulence? It points to a very limited sphere of thinking when you advocate that holding only dollars is the best strategy. It is a fallacy to believe that there is no refuge outside the system; that you have to be trading paper tickets all the time to “keep up” with the dilution of your purchasing power or just stand by idly holding dollars while the government rapes you. Gold is your refuge outside the system.


Got Gold, Mr. Denninger?




__________________________________________________________________________________

*In general we can state that they are “fiat-money deflationists” since the process of money creation is same in all the countries i.e. money is created as debt and the collapse will follow a similar route. The only caveat in my opinion is that since the dollar backs all the other fiat currencies, it *might* collapse last. Also, to keep things simple, for the rest of the discussion, we’ll simply use the term “dollars” with the understanding that it can be used interchangeably with the general terms “fiat currency” or “fiat money” since it is one itself.

For an excellent discussion refuting the dollar-deflation theory and why the dollar WILL eventually hyperinflate, please refer to "No Free Lunch".

36 comments:

  1. It's difficult to wade one's way through a long article when the third sentence is an obvious distortion:

    > From what I hear anybody even mentioning the
    > word Gold runs the risk of being permanently
    > banned from one of his "forums"

    That's why Karl has a Metals sub-forum,
    http://tickerforum.org/akcs-www?forum=Metals

    .. and why he analyzes at the Gold Futures chart almost every night in his trading videos, right?

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  2. @Anon:

    This is why I said "from what I hear". And it isn't meant literally. It simply means that having an open discussion about Gold with Karl is pretty difficult because the moment somebody says something he doesn't agree with, they get banned. At least that has been the experience of people I have spoken to. The main goal of this article is not to bash Karl (as I point out - he is on my "must read" list), but to dispel the misinformation surrounding Gold.

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  3. Have you yet read Carls rebuttal? He kinda rips you a new one.

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  4. @Anon:

    Not really. The way he's literally frothing at the mouth, it seems like he got ripped a new one - LOL!

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  5. I follow Prechter very closely, and his opinion is that dollar collapse and hyperinflation in dollars will happen, but not yet.

    We are not having a US sovereign debt crisis yet. What we have is a dollar-deflation crisis because there are trillions of dollar-denominated debt being defaulted or being paid back and the amount of dollars in circulation is decreasing, despite all the QE programs.

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  6. Karl wins on points. Important to me because I have real money in this game.

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  7. @Anon:

    The dollar has already been hyperinflated. Only the realization remains. The QE is just the icing on the cake.

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  8. @Anonymous

    I understand your point. I disagree, though, because I am looking from a different perspective. I suspect that the 'real money' you have 'in this game' is not denominated in ounces, and therefore does not meet my definition of 'real money'.
    The terms with which you, Karl, and indeed almost all contemporary commentators in economics use reveal the use of this perspective. This why these people struggle to predict where our current monetary system is going.

    "The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false."  --Paul Johnson

    The study of history yields greater and more useful perspective. Of course, only through experience (ie. personal history) does this fact reveal itself.

    http://neuralnetwriter.cylo42.com/node/2800 is an informative read in this regard.

    @Gordon Gekko

    Thanks for the post. Hopefully a few more people will see the world with a wider view as a result of reading it, and save themselves a lot of anguish.
    You may enjoy the content of this thread... http://neuralnetwriter.cylo42.com/node/2921

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  9. Thanks Capt Goodvibes...and thanks for the link too!

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  10. No worries, feel free to join in.

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  11. I tried posting this at Marketoracle.co.uk, but since I am not seeing any comments show up there at all, I assume it fell victim to the cacheing bug that is mentioned next to the comments box.

    Before I repost that comment, however, I would like to note that I am one of the people who got banned from Denninger's forum for daring to question his judgment on gold. Although Karl has a subforum for metals, that does NOT change the fact that he created it precisely so that he could force "gold bugs" into his little gold ghetto, and so that Karl could point to it as a justification for banning anyone who dared to question his judgment on gold when he makes comments denigrating it in his "tickers" or elsewhere on the forum.

    Denninger had a good understanding of the situation three years ago, but every single prediction he has made on Bernanke's response has been shot down in flames. Denninger's arguments and reasoning have been exactly right, but Bernanke clearly doesn't care about doing what is right, only about doing what is expedient, and more importantly about bailing out Wall Street while doing so.

    Perhaps the funniest thing I have read from Denninger was written the day he got to ask Bernanke a question on some webcast, and took Bernanke's noncommital hand-waving response to mean that Bernanke agreed with Denninger that monetization was impossible. The funny part was that Denninger seemed more focused on his belief that Bernanke recognized his name, rather than on Bernanke's answer. Not only that, but Denninger also seemed to think that Bernanke's evasive answer indicated agreement with Denninger's "thesis" -- completely ignoring all of Bernanke's other "say one thing, then do the opposite" past acts, not to mention Bernanke's and the Fed's apparent criminal behavior in leaking rate-cut decisions to the major banks before making them public.

    Recently, Denninger has been arguing that the Fed cannot and will not monetize its way out of debt because entitlement spending is linked to inflation, and so monetization would increase the amount owed for entitlements too. That would come as a shock to all of the retirees who complained for years that Social Security wasn't keeping up with the rapid rise in the cost of housing, food, and taxes.

    Weimar-style hyperinflation is unlikely, in my opinion, but stagflation, such as the U.S. experienced under Jimmy Carter, seems to me to be "baked in" at this point. Ten percent inflation a year for a decade or two would solve the banks' problems handily, particularly when the banks are paying less than a quarter of a percent in interest to depositors because the Federal Reserve is "loaning" the banks all the fiat money that they need.

    Lucky for Mr. Denninger he's a day-trader, so he won't get burned too badly by his long-term beliefs. He's also stated on his forum that if the Fed switches to obvious monetization, that he will switch sides in a heartbeat. Courage of his convictions, and all that.

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  12. Thanks for your detailed input George K.

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  13. Gordon how will all the credit that is required to make hyperinflation occur, and thus gold have intrinsic value, happen when banks arent lending to those who need defaultable (ie...borrow to eat) credit, and the consumer who can afford to borrow, wont.
    I think the thesis about gold being real money while it sounds true, is false for the reason that the gold supply can and will be manipulated by banks (just as it is now) unless the US govt could domestically produce all the gold it needs to peg our dollars to.

    But I dont take chances:I see both sides and own gold and dollars. that way ill only lose 1/2 my a_s.

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  14. Good for you Anon. Let me repost a comment I just posted on ZH:

    "The wage earners don't have any pricing power left today, so forget about a wage price spiral. Speculation in the trillion dollar derivatives markets is what determines prices today, and when the massive amount of currency absorbed by that market lets itself loose on REAL goods and commodities including Gold - as well as mountains of currency sitting in investment accounts - that is when we will have hyperinflation."

    This will happen as more and people realize that Gold is the ONLY safe haven.

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  15. Great points on both sides. As a metal lover proof there is no bubble is that most have a visceral hatred for gold; Man if even 5% of folks had 5% in metals.....you know where I am going.

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  16. Hello "Gordon"-

    I am a long time member of Karl's forum, and as well follower of his informative articles. I too trade for a living, and agree with a great deal of what Karl says, but surely not all of it. Give and take...with salt or no salt. Believe only that which you are prepared to support with your own money, everything else is just hot air. I do not invest or speculate in gold or equities, only spot 'currencies' and 'currency' futures. As a by-stander, I would simply point out these three things:
    1) Conspiracy cannot ever be the corner-stone of a secure and safe investment thesis (i.e, gold's price is 'artificially suppressed'). You may 'feel' differently, but there exits no manner in which one can prove and support a thesis which is lynch-pinned by non-PROVEN facts.

    2)You waste your time trying to paint Karl into a corner and lose credibility when things become about back-handed insulting. Although perhaps entertaining, it's the work of a jester, not an authoritative financial commentary.

    3) Do you realize where prices would be if we in fact were experiencing hyperinflation? As the charts tell you, gold fails to be spectacular over the long run, oil is off 45% from it's 2008/2009 high, home prices are off 45%-60% from 2007 highs, incomes are down to flat, interest rates have pushed nearly to ZERO while the equities markets have failed to hold even HALF of the gains from 2000 to 2010....Where sir, is your hyperinflation in REAL terms. No economist BS, spinning of charts, etc. REAL terms. Living terms. Paying rent, buying food terms? Where?

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  17. @Anon:

    1) With all the documented work of GATA, I'm not suer Gold price suppression is a "conspiracy". Indeed, considering the events that are taking place now, the REAL conspiracy is that we are living in a free and democratic society.

    2) I completely disagree with that. If anybody is "jestering" and insulting, it's Karl, not me.

    3) Did I say we are in hyperinflation already? No. I said that we WILL get there - for sure. BTW, I see that you didn't mention Gold which is at its all time high. Also, wage price rise has NOTHING to do with hyperinflation, which is a currency collapse.

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  18. @getyourselfconnected:

    So true. I mean most mainstream people HATE Gold right now. The real top will be when Karl's disciples start buying.

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  19. I too have been critical of Karl. (Google "All hail the power of the printing press") A year ago I made the argument that these criminals could jack up the DOW to 15000, even if 50 million Americans were living in tent cities. But of course he is still on my must read list.

    Some comments: We are not going to get hyperinflation because the dollar is world reserve currency. It may fluctuate, lose half its value, etc, but we wont go Weimar.

    I agree with Karl about the LEAP calls. Only problem is the VIX is likely to be very high when one buys those calls, and low when you actually go to cash them in. So if we get a big inflation, and SPY doubles and gold triples, then the actual profits from those LEAP calls are likely to only be around 5X rather than the 20X Karl says. My own take is that natural gas is a way to go. Leverage is much cheaper due to the unique situation with natural gas. But regardless, I see no point in betting for or against the type of scenario where our currency is literally toilet paper. At that point gold dont matter, guns do. And even more importantly, trustworthy connections.

    Re: your "Poor gold" paragraph. Have you heard of Kondratiev Winter? If you follow the supercycle, you do not want to hold gold in the spring or fall. My best guess is that we enter that "spring" cycle in 2017, but I really dont know. We could be entering it now. I seriously doubt it, but that possibility grows. No matter what your opinion on gold is, it is paramount to hedge against this. Because that is where the REAL money is made. Again, I'm talking about wealth in a world worth having wealth. Not a post apocalyptic...

    Karl's definition of "money" is as good as any. "The sum of unencumbered assets against which one is both WILLING AND ABLE to borrow". IF you agree with that (I dont know if you do) then you must accept the fact that the price of gold is deeply dependent on our credit system. Gold will lose value if the global credit bubble actually does implode. Given how much of our credit bubble is undeniably ponzi, gold bugs should be worried. I believe the main reason gold continues to rise is the fact that most of the world believes in central bankers' ability to maintain the ponzi. To be long gold is to bet against who you'll surely admit are some pretty damn powerful people. Do you see a conundrum here?

    ReplyDelete
  20. Money is anything that two or more people agree to use as an medium of exchange. It could be cowpaddies if you want.

    The current system you use "credit" as money. As with anything you use as your medium of exchange, if you decide to lend and borrow at a rate of compounding interest, eventually you will not be able produce what is needed.

    -The credit system will implode because of human's false assumption that humans can supply and demand exponential growth see compounding interest
    - Without the credit system production will nose dive to levels never envisioned
    - System will collapse
    - Liquidation will occur, last time 100 million were liquidated, this time probably a couple of billions and a lost generation or two.

    ReplyDelete
  21. @Iconoclast421:

    "We are not going to get hyperinflation because the dollar is world reserve currency. "

    Actually the dollar has already been hyperinflated. It is the recognition which is getting delayed due to it's status as reserve currency. Once loses that status - and it WILL - the emperor will be naked for all to see.

    "At that point gold dont matter, guns do. And even more importantly, trustworthy connections."

    Are you sure you will be in the streets slinging guns? - perhaps in the US, but that will not mean the whole world will be destroyed. People who held Gold in Weimar and say, fled to the US (or another country) were able to protect their wealth - or they could have just waited out the storm in some countryside and used their stored wealth in Gold when things went back to normal - as they in fact DID. I suggest you should read up on some history. This US centric thinking is the Achilles heel of many Americans.

    "Kondratiev Winter?"

    Is that an exact science?

    I don't agree with Karl's definition of money.

    "I believe the main reason gold continues to rise is the fact that most of the world believes in central bankers' ability to maintain the ponzi."

    Actually, the reason people are buying Gold is that they DON'T believe in central bankers' ability to maintain the ponzi.

    ReplyDelete
  22. "hyperinflation"

    Credit is used as money, the USD is a credit instrument which pays no interest to bearer.

    Hyperinflation would be the rapid increase of the credit system. The credit system has been expanding at a 7%+ rate until 2009, the system is no longer expanding. This is not hyperinflation.

    It's a collapse of the credit system because new credit is not being created exponentially.... see Federal Reserve Z1 report. Money supply is shrinking.

    ReplyDelete
  23. "perhaps in the US, but that will not mean the whole world will be destroyed. People who held Gold in Weimar and say, fled to the US (or another country) were able to protect their wealth - or they could have just waited out the storm in some countryside and used their stored wealth in Gold when things went back to normal - as they in fact DID."

    The whole world will not be destroyed, just most civilized parts. The germans were able to recoup from the early 20s because the rest of the world's credit system was still expanding lead by the UK and the Sterling, which is exactly how Japan has been able to survive the last 20 years. Eventually, Japan with the rest of the Asia and the world will be in flames as soon as the system completely collapses.

    Sure if you were a German in 1923 you could run, now fast forward to 1940 and let me know where they were going to run to.

    The global credit system will collapse, there is no alternate system that gets turned on. The last place I would want to live is Asia when the credit system finished it's collapse and the liquidation begins.

    ReplyDelete
  24. @Darkest Days:
    Ref. your first comment: I agree with it for the most part except:

    "Without the credit system production will nose dive to levels never envisioned"

    Sure, initially it might. But as capital is transferred from weaker to stronger hands via the massive upward revaluation of Gold in real purchasing power terms, there will be a lot of prepared people left to restart things.

    Ref. your second comment: Hyperinflation WILL NOT be caused by an increase in credit (which Karl mistakenly thinks to be "money" BTW), but by the Fed/CB's printing money to cover the destroyed debts - as they are in fact doing right now.

    "The whole world will not be destroyed, just most civilized parts. "

    Fully disagree. IMO, many people - except the dollar deflationists and "the US is the center of the world - we're a superpower and it CANT happen to us - we'll take down the whole world with us" crowd and sheeple - have been preparing for just such a collapse. Why do you think the gold price is rising? I'm not saying the transition to a non-US world will be smooth - many countries will be tossed to the trash can including the UK and Japan - but human society will continue to exist as it always has, and use Gold to restart the economy as it always has too.

    ReplyDelete
  25. "Ref. your second comment: Hyperinflation WILL NOT be caused by an increase in credit (which Karl mistakenly thinks to be "money" BTW), but by the Fed/CB's printing money to cover the destroyed debts - as they are in fact doing right now."

    I don't know what you mean. Again, inflation is the increase of the money supply, you use credit as money. Hyper-inflation would be the rapid increase of the money supply. You use credit as money, this is just a fact.

    I am telling you what the definition is.

    "Fully disagree. IMO, many people - except the dollar deflationists and "the US is the center of the world - we're a superpower and it CANT happen to us - we'll take down the whole world with us" crowd and sheeple - have been preparing for just such a collapse. Why do you think the gold price is rising?"

    Of course, I imagine there was someone sitting in Roman having tea while Rome collapse. Or sitting in a cafe in London as the credit system there collapse in the 1930s.

    Virtually all asset classes have been having large swings in both directions, go look at the charts of stocks and other commodities... so what.

    "I'm not saying the transition to a non-US world will be smooth - many countries will be tossed to the trash can including the UK and Japan - but human society will continue to exist as it always has, and use Gold to restart the economy as it always has too."
    There is no alternate system which is why the US was going back into a depression in the late 30s when the world brought Hilter around to do a fast liquidation process.

    "use Gold to restart the economy as it always has too."
    Maybe, wake me up in a few generations, eventually humans will use gold and start lending and borrowing at a rate of interest, basically a rinse and repeat.

    Sorry, billions will have to go, you can't feed 7 billion without a credit system and it's going away.

    ReplyDelete
  26. @darkest days
    "Hyper-inflation would be the rapid increase of the money supply."

    What you're saying that we always create money as debt (credit) - well, that's not ALWAYS the case - such as when the CB prints currency (or creates digits on a computer and "buys" things. When the Central Bank creates ledger entries to fund the government debt and cover bank losses such as outright buying MBS, who "borrowed" the money? NOBODY.

    This was the mistake Prechter made - as he himself admitted - he didn't think the Fed would outright purchase MBS, bonds, etc.

    "There is no alternate system"

    Big mistake. Watch. As another said "Time will prove all things"

    Why are you so intent on killing billions? Maybe they will, maybe they won't - who knows? But of course , dollar-deflationists most definitely will "go".

    ReplyDelete
  27. Not sure if anyone would care to read this especially as it attacks some of the assumptions that Mr. Denninger is making, but for the record I conceder gold to be the ultimate fiat currency, it has value only because people give it value, but that store of value has been around for a long time. Also for the record I’m a self proclaimed silver bug. I apologizing in advance to Mr. Denninger , but here are a few of my pointed attacks.
    The founders based our monetary system on silver, not gold. The reason for this is quite simple - silver is both consumed and thus has industrial purpose - that is, it has significant intrinsic value. No arguments with the analysis however the first part would mean that the founding fathers were psychic, as industrial consumption did not take off until way after they were dead. The US mint had vaults full of silver dollars until the 50s\60s, when electronics started to consumed vast amounts of silver. The season why the founders loved silver as mentioned by Mr. Denninger is because gold can be easily manipulated while silver cannot, which brings me to my next point
    Mr. Denninger makes fun of the idea that there is a suppression\manipulation of gold yet states that the Founding father wanted silver because gold was easily manipulated. Timing not being an issue as people were making fun of him when he stated that housing was overvalued and that there was outright fraud in the housing market, could there be a distinct possibility of gold manipulation for this length of time?
    Mr. Denninger states “Gold-backed currency is a banking cartel member's wet dream.”If so then why did they take us off it? Why not re-implement it? Greenspan seemed to love the idea of a gold standard before he became Fed Chairman, but once in power made no moves to implement one.
    Mr. Denninger states” by being able to control gold supply through such a corrupt system they could easily cause deflationary collapses any time they wished, thus escheating all property carrying debt to themselves literally on demand. Such was common practice prior to the abandonment of gold-backed currencies.” I agreed with you in principle but then gold’s major function is act as a fly wheel that stops governments from inflating the currency. Now I have a simple question, how is the current deflationary collapse working for them today? They do seem to own a lot of property but they also seem to be insolvent. Are you saying under a gold standard they would be able to do this without bankrupting themselves in the process? I think under a gold standard these fraduant banks would not be in business as all the depositors would have withdraw their gold, marked to fantasy accounting would not work, nor would there be any TARP funds. The central bank could release its gold reserves to support the bank(s) but if that worked then Roosevelt and Nixon would not have gotten us off the standard to begin with

    ReplyDelete
  28. Mr. Denninger states “Prove it. You conspiracy theorists on this topic have been ranting for three decades about the same tired song - that it's all "price suppression", that "the gold doesn't really exist", and on and on and on.” I really hate this tungsten story as I think it’s all BS but Mr. Denninger did not read his opponents argument he was referring to Mr. Denninger ‘s statement about the suppose tungsten bars “polluting the metal market.” Does Mr. Denninger want his adversary to prove his own comment? The issue is if someone is able to prove that some of the gold bars are actually tungsten, will the event will be deflationary (wealth destruction) or inflationary (a rare commodity is now even rarer). In this type of event I personally believe that anyone who can verify that they have “good” gold will be able to sell it with a massive premium, but that is just me.
    Mr. Denninger has a strange idea about hyperinflation. First we get that “Those who are looking for hyperinflation are about 20 years too late. We already had it.” Then we get “Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head.” I guess I have rocks in my head but I have a hundred trillion dollar Zimbabwe dollar bill that says otherwise. Then I’m also not alone as it is my understanding that although the threshold for hyperinflation is arbitrary, economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50 percent. What Mr. Denninger describes is less than 100% per year. Did we have high inflation of course but we did, but hyper inflation, we were not even close to it. Anyway with the two authors having vast differences on what amounts to hyperinflation there can be no consciences and with this I wish everyone a goodnight

    ReplyDelete
  29. To the June 1 10:04pm Anon, Denninger's "easy manipulation" strawman argument is based on FDR's revaluation of the U.S. dollar against gold back in the early 1930s (1934, if I recall correctly). Overnight, the dollar was redefined from being $20.67 per gold ounce to being $35 per gold ounce.

    The glaring error in this is that GOLD was not revalued, the DOLLAR was. Much as I've heard of the Euro changeover -- a Deutschmark would buy a cup of coffee the day before the conversion, and a Euro would buy a cup of coffee the day after, but the conversion rate was two Deutschmarks per Euro. . . .

    Mr. Denninger's second strawman argument has been that the government could suddenly declare ownership of physical gold to be illegal and confiscate it just as FDR did shortly before he revalued the dollar. Mr. Denninger mysteriously ignores the simple fact that back then, the dollar was tied directly to gold, and so ownership of a piece of paper with "$20" printed on it was (in theory) identical to ownership of a chunk of gold stamped "$20" by the U.S. Mint.

    Of course, today, if the government were to send agents to people's banks and homes demanding that people hand over any and all of their American Eagle gold ounce coins stamped "$50" (current market price, approximately $1200) in exchange for a piece of paper with a lovely etching of Ulysses S. Grant on it and printed with "$50", there would quickly be piles of dead government agents laying on people's lawns. Particularly when the "gold bugs" Mr. Denninger so often derides also tend to be heavily armed raving paranoid anti-government loons (unlike the peaceable, kind, gentle, heavily armed raving paranoid anti-government loons who inhabit Mr. Denninger's forums). But Mr. Denninger apparently finds this side issue inconvenient to his argument and so never addresses it. Typical.

    ReplyDelete
  30. Denninger fails 10 points, wins 2
    =================================

    You may wish to review my comments at the bottom of the prior article by Gordon Gecko:

    http://www.marketoracle.co.uk/Article19914.html

    My thesis on the End Game for gold investors also has some relevance:

    http://www.marketoracle.co.uk/Article20327.html

    Points against Denninger's rebuttal:

    1) LEAP Calls on stocks may not work out if those companies that go bankrupt in an hyper-inflationary environment. Also Denninger is wrong to say he only needs to stay ahead of the lose of purchasing power of the currency, he always has to stay ahead of rising taxes, to pay for the socialized welfare unemployed.

    2) Denninger argues that the dollar is appreciating relative to "30 years income pulled forward by credit" over-inflated housing prices. Geez, I just built a 1000 sq.ft. home made of solid concrete and steel for $7000 in a developing country (no permits needed!). The prices of houses here are basically the cost of the raw materials. Denninger also does not understand that protectionism is a hidden tax (the free market routes around all costs, Coase's Theorem). Your net worth will decline in global purchasing power with his strategy. Dollar is declining relative to gold and silver since 2001.

    3) I agree with Denninger that gold bugs hoping to break the tax laws will be destroyed:

    http://www.marketoracle.co.uk/Article20327.html

    4) Denninger implies that hyper-inflation won't happen again, because it didn't happen in 1980 when Volcker raised interest rates towards 20%. He forgets we are net debtor nation now, and the PUBLIC sector interest rates can not be raised that high without causing debt implosion, which is politically intractable:

    http://www.marketoracle.co.uk/Article20277.html

    Note private sector interest rates are already high:

    http://www.marketoracle.co.uk/Article20327.html

    5) Denninger fails to understand that gold is a hedge against negative REAL interest rates (which must remain negative until end game of hyper-inflation per #4), not inflation nor deflation:

    http://www.marketoracle.co.uk/Article20263.html

    (continue in next post)

    ReplyDelete
  31. (continued from prior post)


    6) Denninger is correct that gold is a damn good geopolitical hedge, and with lastest Matt Simmons revelation that the BP well in Gulf of Mexico is NEVER going to be capped (short of a nuclear bomb down the hole), and Iran/Israel situation to blow any time, this would be a good time to have some gold insurance in your portfolio.

    7) The BIS and Jeff Christian in recent GATA debate, both say the gold isn't there. And apparently Larry Summers is on record proposing price suppression in a research paper and his actions:

    http://www.marketoracle.co.uk/Article20263.html

    8) Denninger argues that anything that has a value above the cost of its input (i.e. anything someone made a profit margin on) is CREDIT. Nonsense! Credit has nothing to do with profit margins. Credit is a promise to pay in future (and usually at some interest rate above 0%). There is no promise made when someone pays someone a profit for producing gold! The implication of this error is that Denninger is lacking fundamental understanding of economics. I suggest he read Adam Smith.

    9) Denninger fails to understand that those who control the creation of the money supply and credit (owners of the central banks), thus control the government by buying the politicians.

    10) Denninger does not understand that ability to trade dollars for gold, is what allows the dollar to have any value at all. If ever the Comex and LBMA fix, can not deliver physical metal for contract, then their pricing power will be lost and the dollar will hyper-inflate towards 0 purchasing power (infinity gold price). The way this will happen is when the masses are forced to jump from the dollar to gold and silver:

    http://www.marketoracle.co.uk/Article20327.html

    11) The founders of USA created a bi-metallic system of gold and silver. The metals must be allowed to compete with each other to regulate the manipulation of each. Denninger is correct that gold is more pure monetary and silver more industrial and (before) currency oriented. But he fails to understand that what makes these metals monetary is not some trust in nothing intrinsic, but in fact in their very high stocks-to-flows ratio. Meaning that the annual mining production is very small relative to above ground stocks. But silver is really in a special squeeze on above ground stocks:

    http://goldwetrust.up-with.com/precious-metals-f6/silver-as-an-investment-t33-225.htm#3188

    And Denninger is correct that elite hate silver, because they can't control all of it, and they made the mistake of demonetizing it in 1965 globally, and this is going to bite them back hard now (see link above).

    12) Denninger fails to understand that gold was money in 1800s and that meant you could earn compound savings in gold, and thus 1800s for 33,900% more return for savers than 1900s:

    http://www.marketoracle.co.uk/Article16212.html

    ReplyDelete
  32. Thank you for your great comments Shelby!

    And yes, I already read your comments and the article on marketoracle.

    All we can do is try our best to preserve and protect what we have. If you have given it your best, then I say stop worrying and let the chips fall where they may :-)

    ReplyDelete
  33. Thank you. I appreciated very much that you wrote those 2 articles. I have an archive of venomous emails from Denninger.

    I am supportive of most of FOFOA's logic, but we differ on whether Rothschild and mankind's demand for credit is impotent:

    http://goldwetrust.up-with.com/precious-metals-f6/how-will-we-physically-trade-gold-silver-at-5000-500-t61-120.htm#3227

    I think the hyper-inflation is by design of the banksters:

    http://www.silverbearcafe.com/private/01.10/thinklikeabanker.html

    Of course, I hope I am wrong, but we have silver any way!!

    My only argument is also don't forget about keeping some capital at work in businesses that can excel in hyper-inflation. If you are clever, you can think of some.

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  34. @Shelby:

    It is hard for me to believe that the banksters are unaware of the limited lifespan (and death by hyperinflation) phenomena attached with fiat currencies. Whether they intentionally "cause" it or not, nature itself ensures that paper currencies are limited in their lifespan. Of course, since they know this phenomena extremely well (since it is their business to know), they can time their actions around it (and perhaps even give it a little push) so as to benefit the most from the currency collapse.

    ReplyDelete
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  36. Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong
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