Debunking Deflationist Myths & Scare Tactics About Gold
Haven’t you heard?
As I type this, the US and other world economies are supposedly in nothing but increasing deflationary pressures that will not be able to be stopped by any government or central banker no matter how much stimulus or money printing they decide on doing!
At least that’s what many of the talking heads on financial TV are telling us especially within the last month or so. They have been saying this message for awhile now. Here’s an interview from Mike “Mish” Shedlock from October 2009 talking about deflation:
And so begins another inflation vs deflation debate.
Many of you who don’t want to learn everything there is to know about macroeconomics to understand what is really going on in the world right now are probably wondering is there an investment that will do well in inflation and/or deflation so you don’t have to be an expert economist to protect yourself and make an investment decision and get on with the rest of your lives?
First off, this is the best explanation summary I have read recently of what’s happening.
John Williams of ShadowStats even agrees (about short term deflationary pressures) as far as M3 goes, but is M3 even a valid measurement of the money supply and therefore of monetary inflation? My Austrian Economist friends would disagree with him here about M3 being a valid indicator of the true total money supply, but The M3 Money Supply figures John Williams has recreated do show M3 dropping! 
All of this I just mentioned about deflation will be a moot point if Ben Bernanke and other heads of central banks, including the IMF and Bank of International Settlements (BIS) aka the Central Banker’s Bank decide to step on the gas pedal and add more gasoline to the fire via more stimulus!
The Italian Keynesians in Italy are even upset with Germany for its “deflation policies.”
Despite declining M3 figures, ShadowStats’ Consumer Price Index (CPI) calculations also show inflation in consumer goods and services as measured by rising prices running at around a 6% clip.
James Turk, author of the book Dollar Collapse, Founder of the precious metals storage company GoldMoney, and a consultant for GATA thinks that hyperinflation is still by far the most likely outcome in his latest analysis.
What do these mixed signals mean? What’s the truth? Can I protect myself from inflation and deflation at the same time? (The short answer is Yes, you can.)
Commodities are really the only asset class still in a long term, secular bull market and as an investor looking to protect and grow your wealth long term, I believe you need to be invested in this powerful long term trend.
I have already written a previous and very detailed article on Silver, which I think is perhaps the best long term investment one can make. Wall St for Main St Co-Founder, Mo Dawoud, of Mo Money Blog also has an article about Silver.
But, today I wanted to talk more about Silver’s more popular big brother, Gold.
See Gold has a secret power that most people don’t even know about! Besides doing well in inflation, Gold also does well as a deflationary hedge!
Surprised huh? I will start my case for how and why gold does well during a deflationary environment later in the article.
So what’s really happening in our economy right now? What should you believe? Which experts should you trust? How can you protect your portfolio in case of inflation or deflation or both? Are we going to have bad inflation, bad deflation or will it be some sort of weird, hybrid mix that will hurt and destroy everyone (some more than others)?
These are the types of things Mo Dawoud and I think about everyday at Wall St for Main St.
Despite the evidence I have shown you of conflicting inflationary and deflationary pressures happening worldwide (I could show you a lot more conflicting evidence still but let’s keep this article relatively short) and no real clear winner in the near term, in an “I told you so” trumpeting fashion, deflationists like Bob Prechter of Elliot Wave International and Harry S. Dent are coming back out of the woodwork to pat themselves on the back for being right about their long term, “Deflationary Death Spiral” predictions.
What’s funny is deflation is really not a death spiral at all. We were just taught it was in Economics 101 by our Keynesian teachers and professors.
In fact, deflation is the cure for all of the inflation that’s been going on in our economy and monetary system for many decades. Deflation is something the markets badly want as a cure for our extreme debt problems.
The problem with deflation is central bankers and governments want to do everything they can to prevent it.
The truth about deflation is economics and business students have been brainwashed for decades that higher prices are a good thing! Higher (rising) prices are in fact inflationary if they are rampant in our economy.
Saying higher prices, loss of purchasing power in our money and therefore inflation is a good thing is a complete and total lie engineered by Keynes and his economic disciples, like Paul Krugman, who have written your school’s economic textbooks to justify government’s hidden agenda!
Higher prices are only good for higher taxes and for specific corporations. They have ZERO benefit for everyone! Higher prices do not produce higher wages. Increasing production and efficiencies, lowering costs and adding more useful skills produce higher wages.
If a business tries to raise prices too high, a competitor will come in and compete and threaten to steal market share or worse, bankrupt the company.
When the free market system is functioning properly due to innovation, proper competition and other gains in efficiency, prices should actually be falling on all goods and services while the quality of goods and services increases.
Capitalism or the free market system was founded on the belief of “Creative Destruction.”
To give you an example of how the free market works properly to benefit consumers, this is why a $600 50″ Flat Screen LCD TV of today is cheaper and of higher quality than a $5,000 30″ Flat Screen Plasma TV was of say about 7 years ago. This is how a market is supposed to behave.
We still have some markets correctly behaving in this manner but not nearly as many as there should be. This is 100% due to government interference in specific markets, like healthcare to name just one, and also large corporations deciding it is in their best interest to pay to lobby Congress and get tax breaks, tax rebates and subsidies instead of investing that capital in more useful things like innovation, research and development and other things that would have a long term benefit to society and to the company.
Many corporations have now sacrificed long term gains for short term profits. Malinvestment, corruption, inefficiencies and overbearing regulations are suffocating many markets and are preventing proper competition.
Competition and the threat of extinction produces innovation and better technology, lower prices and higher quality in all goods and services.
The problem is governments don’t like deflation even if that’s what the market says we all need to have happen. Actually, ‘don’t like’ is not strong enough. They hate deflation and will do everything in their power, legal or illegal, to fight it!
This often means changing the rules of money.
Why? Because government’s interest and the interests of specific corporate special interests completely conflict with the interests of its citizens.
The interests of government and its citizens, for the most part, are no longer aligned, which is sad, but that’s the truth about what has become reality now. Government is now a separate entity much like a corporation is a separate entity.
Many governments are still spending frivolously and have not tightened their belts like the rest of us are being forced to do in our personal lives and in our businesses.
This is the brainwashing I am talking about. You have been led to believe that there is nothing wrong with higher prices on the goods and services you need and want. I am telling you the opposite is true.
Why does the government hate deflation and lower prices?
Because it lowers their tax revenues, it gives private citizens back their purchasing power (makes money more valuable to hold and save and invest) in their money and it lowers asset prices and other other consumer prices for goods and services we need and want.
Deflation does not allow governments to use inflation as a tax to steal our purchasing power (inflation is 100% pure government policy and is really nothing but an invisible, hidden government tax) and it lowers the taxes they collect on normal things like wages, property tax, etc.
This is one of the major reasons why there is so much effort by the Fed and Federal Government to try to re-inflate the housing bubble and to create inflation.
It’s in the government’s interests to create inflation (not too much inflation at once or too many people will wake up and realize and also dump the paper, fiat currency).
The bottom line is modern governments and central bankers have not allowed deflation to occur without first trying to interfere heavily in a country’s economy and markets and to first create inflation.
History is strewn with countless examples of interventionist policy by governments where the free market was not allowed to heal itself and purge itself of the bad investments and misuse of capital.
There is some revisionist history out there in textbooks that says FDR saved the US from a deflationary death spiral during the Great Depression of 1929 because his predecessor, President Herbert Hoover, who was supposedly a proponent of the free market stood by and did nothing.
Unfortunately, this is another lie we have all been taught and you will have to unlearn.
The truth is FDR just continued what Hoover started. Hoover was an interventionist also. He was anything but a “free market” guy. History book writers who wrote the textbooks we used in school all needed a goat to make FDR look like a hero and so the “truth” about Hoover was twisted to make FDR look great and Hoover look like an evil and uncaring Capitalist pig.
The last non-interventionist President that allowed a pure deflation and did not interfere in markets was President Warren Harding during the Great Depression of 1920. This is a video of a 50 minute speech Austrian Economist, Author, and Economic Historian Thomas Woods gave on the subject:
Harding refused to interfere in the markets and he ran on an “allow deflation” platform. In fact, Harding even cut government spending in half!
While the first year of that depression was very hard, and I believe unemployment numbers were higher for that first year than in 1929, the US was out of a depression and recovering in only 18 months!
Normally, a hyperinflation occurs followed by a deflation to wipe out the mess completely and so the system (our economy) can hit the reset button.
This is a very painful process, but we cannot avoid taking any pain and I am 100% sure we are going to have to take our “medicine” aka the cure eventually. That cure involves letting bad debts and bad loans and other toxic things like Mortgage Backed Securities go to their intrinsic value of zero or close to it.
Besides congratulating themselves, these deflationists also ALWAYS have one last word of advice.
They tell you to immediately sell your gold and gold stocks! This is it they say. The top in gold is in and they are fully sure of it.
There’s just one problem! They’ve been calling a top in gold for years! How many years have these deflationists been calling a top in gold?
Well, Bob Prechter has been calling a top in gold and silver every slight increase for the last 15 yrs or so! If you followed his advice and shorted gold and silver each time, you might be bankrupt.
Here’s a link to the best summary available on the Internet of Bob Prechter’s track record of forecasts. He and his Elliot Wave followers have been a lot more correct in the short and medium term with their predictions than in their long term predictions. In fact, CXO Advisory Group, the company who compiled the statistics and summary of Prechter’s forecasts gave Prechter a Guru Accuracy Rating of only 26%.
I would not be listening to Prechter for long term investment advice. In my opinion, he’s a very good technical trader. That’s it.
When asked what to buy with the money from selling your gold and gold stocks, Bob Prechter recommends short term US Treasuries as the best option.
That’s funny to recommend you buy debt in a debt crisis don’t you think?
Wouldn’t certain types of cash (non G7 “Westernized” currencies) be better and safer than US Treasury debt? Dent has the same recommendations as Prechter.
A Better Solution
Ok, so why the conflicting evidence of inflation and deflation? Is it even possible to have both inflation and deflation at the same time?
The answer is ‘Yes’ and according to Dan Amerman, this has actually occurred many times throughout history!
Dan Amerman is a former longtime, and now reformed (he saw the error of his ways) investment banker who has switched from helping Wall St design weapons of mass destruction (financial derivatives) to quitting that industry about a decade ago so he could focus on helping out the people of Main St from losing everything they have to Wall St and the government.
He also wrote the textbook many central bankers still use, so it would be slighting him to call him anything other than an expert at what he does.
He has a free Turning Inflation Into Wealth Mini-Course on his website that you can sign up for that he sends to you periodically through email updates.
I’d recommend you sign up for his course as he can help you increase your Financial IQ exponentially for free if you are willing to spend the time reading and learning!
After that brief introduction to Amerman, for those of you unfamiliar with him, now back to my regularly scheduled argument.
Deflationists say we cannot have both inflation and deflation at the same time. Dan Amerman counters that this is the Santa Claus Theory of Deflation that is so prevalently taught in classrooms by economics professors in academia.
For deflationists, this is what they’ve been taught in the economics classrooms by mostly Keynesian Economist schoolteachers and professors who teach central planning, tout higher prices as a good thing, and lots of other Keynesian nonsense and General Theory dribble.
This theory of deflation is theory and jargon and only exists in a vacuum where the US economy is not affected by other global factors and pressures!
In my humble opinion as well as Dan Amerman’s opinion, it can and will destroy your net worth if you adhere to it religiously and bet most or all of your investment and/or retirement money on it.
In fact, according to Dan Amerman, pure deflation where asset values AND prices/monetary supply both deflate at the same time has never occurred in modern history in the way and the historical examples the deflationists claim it has!
Amerman cites deflationists 2 main examples and successfully counters their arguments:
- The US Great Depression of 1929
- Present day Japan, which has supposedly been stagnant with deflation for going on 2 decades now.
I and many other experts not believers in Keynesian macroeconomics beg to differ.
They say deflation, which is a decrease in money and credit, is so powerful that there cannot be any way for central bankers and governments to continue to inflate/devalue/debase the Dollar and other paper currencies. I beg to differ.
As a last resort, the Fed and other central bankers can ALWAYS devalue the US dollar against gold by going into the open market and purchasing gold.
When you do that you are essentially shorting your own currency to make it weaker.
Now, admittedly, the US economy is facing some short term deflationary pressures, but the US economy and our stock markets are not inside a vacuum because of globalization and there is not deflationary pressures worldwide. In fact, China has increasing inflationary pressures!
Another $80 billion Stimulus bill is in Congress already and more will surely come.
There are nowhere near the amount of signs outside of the developed world that deflation is a risk. Inflation is still, by far, the main concern in emerging markets and will continue to be the main concern worldwide for years to come as all world governments continue to print money, Austerity Measures or no austerity measures.
Ok well now let’s move onto the conclusion and something the deflationists really have ZERO credible explanation for happening, the curious case of Homestake Mining.
Citing this example will win you an argument against deflationists of why gold does well during deflation every time!
The Curious Case of Homestake Mining and How it Disproves Everything Most Deflationists Think About Gold’s Behavior During Deflation
I have debated deflationists often about inflation vs deflation and about gold. All deflationists HATE gold and think it is a very poor investment in deflation.
The most popular answers always are, “you can’t eat gold,” “if the world is ending gold will be useless,” “if things ever come to that government is going to confiscate all of your gold and we are going to laugh at you, give you nothing for it and we are going to tell you ‘I told you so’,” “you will not be able to defend your gold,” “water, food, guns, ammo and plant seeds will be more valuable.”
They then say how gold will collapse during a deflation and the price will fall by more than half. There’s just one problem.
History says otherwise!
The truth is they haven’t done their homework.
Almost none of the deflationists I have talked to, and I have debated dozens, have studied Homestake Mining and what happened to the company during the Great Depression of 1929. The deflationist camp cannot explain it away so they simply try and dodge the “Homestake” golden bullet/ace.
For those of you unfamiliar, Homestake Mining was the only major gold mining company listed on the NYSE during the Great Depression of 1929.
When deflation occurred and FDR took over for President Hoover, one of the first things he did was try to seize/confiscate all privately owned Gold.
Government agents were stationed outside banks and people were told to hand in all of their gold in exchange for a $20/oz price. Similar attempts were made with silver.
FDR then revalued gold to $35/oz against the US Dollar effectively devaluing the US Dollar against Gold by over 40%!!!!
The gold was then melted down into bars and a secure storage facility was built at Fort Knox.
After the confiscation, the bankers and people at the Fed knew the gold confiscation and dollar devaluation was coming ahead of time and they acted on this inside information and they managed to buy gold bullion and also shares of Homestake Mining knowing the confiscation of gold would make it a more scarce and desired commodity.
Confiscating gold will also create a Black Market for gold as people will have an even larger demand for it because of its scarcity.
What ensued after FDR’s confiscation of gold was shares of Homestake Mining reacted as a direct proxy for gold. Shares in Homestake Mining took off like a rocket despite deflation (it wasn’t real deflation as Amerman explains because government wouldn’t allow it).
Here are some more articles on Homestake Mining and Gold’s Secret Deflationary Powers proving my point:
- 1929 Market Autopsy
- Frank Barbara’s Analysis from 2005 he did of Homestake, 1929 and The Coming Gold Bull Market
- Physical Gold is Good, But Gold Mining Shares are Better (if they Confiscate Physical Gold)
- Gold Stocks Do Well During Deflationary Times
- Homestake Mining and Dome Mining Outpaced the DOW during 1929 Deflation
- Gold Stocks in a Depression
- Why the Gold Price Made People Millions During The Great Depression
- More on Gold’s Deflationary Powers
- Further Analysis of Gold Stocks During the Great Depression of 1929
- This is Like The Great Depression But Worse
- What if Deflation Wins?
- Gold as an Inflation-Proof Deflation Hedge
- Gold Does Well in Inflation & Deflation
- How Will Gold Perform During Deflation?
- Gold and Deflation: A Dissenting Dissection
- The 2 Best Catalysts for Gold: Deflation and Economic Weakness
- Gold Does Well in Both Extremes
The Bottom Line:
So you now know Gold’s secret power. That besides doing well in inflationary times, during deflationary times gold and gold mining stocks also do well. This is why people need to own both physical silver and gold and also mining stocks as a diversified precious metals portfolio in case of confiscation.
Gold will outperform silver during deflation and Silver will outperform Gold during Inflation. Even if gold is confiscated, other proxies for gold will shoot up in price like Homestake Mining did in 1929!
In conclusion, based on my own research into this matter, whether there is inflation or deflation or both, you will be a lot more protected in physical gold and gold mining shares than you will be in US Treasuries or in a lot of the conventional paper, fiat currencies that are still erroneously considered safe havens.
Moving some cash into foreign currencies outside of US Dollars, British Pounds, Japanese Yen and the Euro is probably also a good idea as well.
What’s happening now in the markets and our economy is exactly what gold was designed to protect against.
Gold is currently being revalued by the markets as money.
It is insurance and protection against financial calamity and chaos.
The deflationists have not properly studied history concerning gold and their arguments have no credible explanation for why Homestake Mining took off like a rocket.
Every deflationist I have talked to has dodged the Homestake Mining argument in fact.
I’d much rather be holding physical gold and gold stocks than holding US Dollars and US Treasuries.
Do you own due diligence into this, but I am of the opinion, that if you as an investor don’t have exposure to physical gold and silver or gold and silver mining stocks, you have not done enough research into this matter.
Governments and central bankers are going to continue to do everything they can to continue to debase, devalue and inflate these paper, fiat currencies and you need to protect yourself from this by diversifying in precious metals.
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