Price Inflation vs. Recession

Look at the peak of gold for the morning and the steep decline, thereafter. Normal market action! NOOOOOOOT! Gold is currently 842 and silver 10.56. Both are down a bit and both are on down ticks.

Gold and silver seem to be parting ways. Gold is generally seen as the only inflation hedge and is recognized as a true monetary metal. Its sister silver is seen as the poor man's gold. Silver is widely used in many areas of manufacturing and will most often act as a commodity. I still believe that silver will have its day as the dollar continues its decline. Where else can we go to preserve wealth other than these precious metals.

Many folks have lived in an economic atmosphere of inflation since Nixon removed the opportunity of exchanging dollars for gold on August 15, 1971. The psychology which one adopts in such an environment is that he must buy his needs today, because tomorrow they will cost most in terms of the paper currency: the dollar. As price inflation increases as a result of inflation of the supply of the dollar (or any other paper currency), individuals take advantage of low cost debt to continue to buy before prices escalate.

There is a sentiment that says that times are really great, so no one is concerned about the level of debt. That vast amount of currency and low cost debt in circulation creates one investment bubble after another. As soon as one burst, the next one begins its course of inflation until it burst. This goes on for a time.

Both wages and prices increase. Most ignore the fact that wages do not grow as rapidly as prices, so debt increases to continue the high standard of living that most enjoy. During such times, there is little reason to save for the future.

If one considers saving, he faces higher income taxation and finds that the paper dollars he saved buy far less than when he originally put them into savings. The net result is a loss in purchasing power. In fact in the 1970s John Pugsley wrote a brilliant way to save without the resulting income tax and loss of purchasing power in his book The Alpha Strategy. He showed that buying non-perishable necessary consumables for future use actually offered real profit. As these were used in the future, there was considerable profit, because they were more valuable and there had been no taxation on the increase in value as they were consumed. That was a great idea for times of inflation, and particularly in hyper-inflation.

All of this has been written to lay a foundation for what is being faced today. In contrast to the vast period of inflation, we are facing a severe recession, possibly depression. Contrary to inflation, the paper currencies as necessary for survival. It is not unwise to stock a supply of essential non-perishable consumables, as well. There may be times of short supply as prices may not even reflect the cost of items, so producers may not want to bring their products to market. (Such is the present case with the bullion coins.)

What we are facing is a vast inflation; that is, the supply of unbacked paper currencies is flooding the world in an attempt to "avoid" depression. This time, it is world wide. While we are experiencing a time of deflation and recession, this flood of currencies is destined to result in price inflation at some time in the future. Keynesian Economics states that recessions are to be avoided by pushing the stalled economy into inflation which can be controlled by reducing the supply of paper currency and taxation.

This theory places the blame for inflation away from the true cause and points the finger of blame to the workers for demanding too much pay, the consumers for spending too much, and to producers for charging too high prices. The real culprits in this are the central banks and governments. But neither will step up to the plate a take responsibility. Thus, Keynesian Economics is the way out for politicians.

Price inflation will be the eventual result of the inflation of unbacked currencies into the markets and other forms of manipulation by governments.

That is when the real value of precious metals will become obvious to all. The we will experience another gold rush. Never have the governments and central banks been able to correct without over correcting in a big way. The result of putting off the inevitable has historically been greater problems of longer duration. Will it be different this time? I think not!


From Bloomberg this morning:
Gold May Drop in London as Lower Oil Diminishes Hedging Demand
By Nicholas Larkin

Dec. 23 (Bloomberg) -- Gold, little changed today in London, may decline as lower crude-oil prices diminish demand for the metal as a hedge against inflation.

Oil extended its drop from a July record to 73 percent on speculation a deepening global economic slowdown will reduce demand. Volatility in exchange rates may also spur investors to trade less.

Cheaper oil “should keep precious metals under pressure,” Manqoba Madinane, a commodity analyst at Standard Bank Group Ltd. in Johannesburg, wrote in a report. “Continued currency volatility today could further compromise precious metals as most investors may opt to watch the developments from the sidelines.”

Read the entire article HERE.

From Town Hall:

Tuesday, December 23, 2008
Another Great Depression
by Thomas Sowell

With both Barack Obama's supporters and the media looking forward to the new administration's policies being similar to President Franklin D. Roosevelt's policies during the 1930s depression, it may be useful to look at just what those policies were and-- more important-- what their consequences were.
Read it HERE.

More from Town Hall:

Jacking Jesus
by Chuck Norris

'Tis the season to be Jesus stealing? Away in a manger, no Christ for the bed? It has become a new Christmas fetish -- neutering Nativity scenes by jacking Jesus.

Just over the past week, dozens of mini-messiahs have been nabbed from Nativities across the country. Residences, churches and even civic displays in New York, Michigan, Nebraska, Indiana, Florida, Tennessee, Missouri, Illinois and Texas have been exploited by these Christmas scrooges.

Read it HERE:

From MineWeb this morning:

Dollar weakness and US deficit will underpin gold price. Potash, oil and uranium also positive - Scotiabank

Scotiabank economist Patricia Mohr forecasts that commodity prices will decline further this month, but also suggests a number of commodities should outperform.

Author: Dorothy Kosich
Posted: Tuesday , 23 Dec 2008 RENO, NV -

As gold well maintained its value at $839/oz in mid-December, Scotiabank economist Patricia Mohr predicted Monday that renewed U.S. dollar weakness, linked to a spiraling US$1.25 trillion U.S. budgetary deficit, will underpin gold prices.

Read it HERE:

More on our Harmony Gold ADRs (HMY) from MineWEB:

Harmony Gold's festive cheer

Top rated gold stocks buck the global equities trend, showing almost effortless ease when raising cash from capital markets.

Author: Barry Sergeant
Posted: Monday , 22 Dec 2008

JOHANNESBURG -Harmony Gold , the world's fifth biggest gold miner by ounces produced, on Monday announced the raising of R979m (US$102m) before costs, by placing 10.5m shares at an average price of R93.20 ($9.68) each between November 25 and December 19 2008. The fresh capital is earmarked mainly to further pay down Harmony's debt, which is targeted, on a net basis, to be around zero by mid-2009. The capital raising is relatively small beer in Harmony's books, given its current market value (capitalisation) of around $9bn.

Read the article HERE:

Good news for Dr. Copper from MineWeb:

Chinese copper imports rise 37.7 percent year on year in November

Imports of refined copper into China rose 9.9 percent in November compared with October and were 37.7 percent higher than the same month a year ago but are expected to fall in December.

Author: Alfred Cang
Posted: Monday , 22 Dec 2008

BEIJING (Reuters) -

China's refined copper imports rose 10 percent in November to their highest level since May 2007 supply tightened in the domestic scrap market and traders stocked up for long term supply deals, data showed on Monday.

Read it HERE:

Headlines from Casey's Daily Resource Plus:

• Gold rises on dollar’s weakness- Silver, platinum both down.
• Dollar down vs. euro- Low housing numbers forecast.
• Crude falls below $40- Declining demand outweighs potential OPEC production cuts.
• Base metals up- Copper gains on low Chinese interest rates.

You can access the newsletter HERE:

From Gary North's Reality check on the Trust that leads to Ponzi enthusiast:

WHEN TRUST RUNS OUT

   Every society and every institution rests heavily on trust.
There is active trust, the result of "trust, but verify."  I call
this stage one trust.  Then there is stage two trust, which I
call default trust: "Trust, and assume that someone else has
verified."  Next, there is stage three trust, which I call blind
trust: "Trust, because there is nothing else worth trusting."
Then there stage four trust, which I call tooth fairy trust:
"Trust, despite all evidence to the contrary."  This form of
trust is the foundation of all Ponzi schemes.

Bernard Madoff took advantage of this final form of trust.
He ran what is said to be a Ponzi scheme of $50 billion.  Or was
it only $17 billion?  The initial reports are sketchy.

Go HERE to sign up for his great newsletter.

The Lord Jesus Christ really knows our frame as the bible says. He knows that we need renewal and encouragement along the roads of life. I believe that is why He gives us seasons, days, weeks, months, and years. As we look to these, we can perceive each as a new beginning. It is an opportunity to do better that we did the day, week, month, or year before.

I believe that is particularly clear to us as we face the New Year (2009). That is why people are prone to make new year's resolutions. However, these are flimsy vows, and though well intentioned, are most often forgotten almost immediately.

For 2009, let us prayerfully and very cautiously make resolutions for the better. Let is make very few and commit, with God's help and grace, to the Lord of all. Then, let us be certain to fulfill them with His help. However, it is critically important to make FEW, because a vow made to the Lord must be fulfilled or there will be dire consequences in our relationship with the Lord. Be certain to confess to the Lord for procrastination on fulfilling any promise made to Him and ask for more of His gracious help. He does provide for His people. Praise Him moment by moment.

Best to each, Doug