Friday, September 27, 2013

The Stealth Deceptive Nature of Deflation and Gold

This week Anglo Far East Treasury Director Simon Heapes posed a question to Jim Rickards regarding the stealth deceptive nature of deflation and how it affects the economy and more importantly the real value of Gold.

Business activity is slowing in the western world yet at the same time debt levels are increasing. This is not just happening on a government level but also on an individual and business level for companies.

The Federal Reserve since 2008 is trying desperately to induce inflation, yet with all the money printing in the order of approximately $85 Billion per month, they are having difficulty getting the desired inflation. The economy currently is wrestling between the stealth character of deflation which is what happened in the great depression. Deflation is the Federal Reserve’s worse nightmare because one the problems stemming from it will mean tax revenues will go down, which translates to debt levels which cannot be serviced by the government! Hence leading to national defaults or worse collapse!


Simon Heapes: For those of us involved with the investors and marketing side, what's happening with the gold price – “price action makes market action” – is confusing a lot of investors. It's like stealth. If it goes deflationary, we should be buying gold, and yet the price goes down. People have it in their minds that they only get involved if the price of gold goes up. Obviously, I can see the inflationary side of things just getting bigger and people rushing through every gate they can find to get gold. But on the deflationary side it’s going to be a bit of a trick convincing investors of what's going on.

Jim Rickards:  That's a very good point, Simon. Your marketing function is really an educational function. I would point to two very powerful examples to encourage investors to buy even in a declining environment, given the end game. You must keep your eye on the end game. The problem is, when the end game comes, you're not going to be able to get gold. It’s not a question of price anymore. You won't be able to get it.
Here are two examples. First of all, everything I just talked about has already happened. It happened in 1933. Between 1927 and 1932, the United States had 25 percent deflation, the only time in U.S. history anything like that has happened. Price levels dropped 25 percent. What did the U.S. government do? They revalued gold. They took it from $20 an ounce to $35 an ounce, which is a 60 percent devaluation of the dollar. They knew exactly what they were doing, and the reason they did it was not to reward gold investors. In fact, they confiscated the gold first! They took the gold at $20 and then re-priced it, because they knew what they were going to do. The reason they did it was because they wanted all commodity prices globally to go up.

Nothing happens in a vacuum. Nothing happens that's not part of a bigger picture.

The reason Roosevelt did that in 1933 is not because he wanted the price of gold to go up; he wanted the price of cotton, oil, steel, and coal etc. to go up. The minute he took gold up, from $20 to $35, it worked. We had a huge stock market rally in 1933, and the economy improved significantly from 1933 to 1936. That was a big recovery in the middle of a depression, but it was because they were successful in creating inflation by re-pricing gold, and everything went up. Then we went into a second recession in the Depression, 1937, which had a separate set of causes. My point being, this is not a theoretical exercise or fantasy. It's exactly what happened, and it'll happen again — not because I have a crystal ball, but because it's the only thing that works. If you get that kind of deflation, it means you've tried everything and failed, so you do the one thing that's guaranteed to work. Re-pricing gold is guaranteed to work.

If you wake up one day and gold is three times higher, expect to pay three times more for a quart of milk. It just means your money went down by two-thirds. By the way, the best performing stock on the New York Stock Exchange in the 1930s was Home stake Mining. The whole stock exchange went down, and the biggest gold mining company in North America went up for the same reason – because they were mining gold. So, number one, there is a concrete, historical example of this actually happening.

Example number two involves the biggest, smartest buyer in the world, which is China. They took 600 tons of gold from the Perth Mint at the lows of about $1,250 in June. They absolutely just drilled it. If you think China are dopes, then fine, but I don't think they're dopes. I think they know exactly what they were doing. When you see the biggest buyer in the world buying at the lows, you ought to think that maybe you ought to buy at the lows. In other words, buy the dips. That's what I do.

Every time I see gold at $1,200 or $1,320, I go out and buy some more, and when I have the opportunity, I just keep accumulating. Gold is going to go higher one way or the other, and when it comes, you actually might not be able to get the physical.

I agree that this is a hard sell, because people have very short attention spans. They focus more on nominal prices than real prices. Trying to sell people on something that might be going down is a tough sell, for very understandable reasons. You just have to say, hey, everything else you want might go down more!

Gold in New Zealand dollars: $1597.25 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)
Low since previous high: $1532.30 (28 June, 2013)

Silver in New Zealand dollars: $26.23 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)
Low since previous high: $23.51 (28 June, 2013)

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