Deflation Caused By Low Gold Price

by Shelby Moore | December 8, 2008

Side walks don't cause falling rain drops to hit them, analogously deflation does not cause low gold prices. Rather vice versa.

No country can de-hitch from the dollar willingly:

“...China is very afraid of one thing and one thing only, and that is if millions of migrant workers in the big cities...will riot...

...If China allows the Yuan to rise then their manufacturers are really punished...because they have razor thin profit margins...”

If the widely reported downward manipulation of the gold & silver prices continues, then the FED's zero-interest rate policy will lead to spiraling, falling dominos deflation:

“...Economic models predict that zero interest rates will pump up home prices, pump up equity prices, and lower interest rates...The assumption, however, is that this action does not cause savings/capital creation to fade. Without capital creation to raise wages and cover losses, the scheme creates its own deflationary forces...

...a graph in the (Koenig and Dolmas – Dallas FED 2003) paper explains clear that the FED must embark on a mission to create inflation...how Roosevelt used gold (upward) revaluation to create the inflation needed to end the Great Depression...”

If the FED action is to buy long Tbonds as suggested above, while gold & silver prices are fixed too low by manipulated futures market, an even greater bond bubble will result, then finally insolvency of the FED (i.e. death of the dollar system):

page 9:
“...This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls...”

In short, deflation can not end until gold & silver are allowed to rise in price, because even the FED has no model with which to start capital formation without a rising gold price. The backwardation of gold is signaling, for the first time in history of the dollar, that the dollar FED is trapped.

Backwardion means the spot price is higher than the future months' prices. People no longer trust future delivery, and are willing to pay more for delivery now than to use margin to make paper profits in futures arbitrage. This can also be because it is increasingly obvious the casino is rigged.

If backwardation is not reversed, world trade could grind to a halt, as more people do not trust to deliver their side of transaction first, a domino spread effect, then nothing can be traded. Backwardation means disintegration of the value of promises to pay. Remember the dollar (and every currency in world) is merely a promise to pay. The paper or electronic digits, have no intrinsic value.

Perhaps the only way backwardation can be reversed, is to let the gold & silver price rise enough and fast enough, to nip the growing disintegration of trust before it becomes too pervasive and engrained. I tend to agree with Fekete, that it is too late, because by this point it is clear the emperor is wearing no clothes and a rising gold & silver price will only mean even more ferocious demand for immediate delivery.

The bailed out banks are indeed buying Tbonds, while it is widely reported that they are also manipulating down the price of silver and gold in the alleged corrupt future's markets. So it appears the FED and it's member banks are indeed trapped and are in a rapacious "eat my own" deflationary death spiral, which will send gold & silver to the moon at the end of the bond bubble. But by that time, the world will be so broken/unsafe/socialistic/fascist/totalitarian that those who hold gold, will be afraid to invest it and restart the wheels of capitalism and world trade. The Dark Ages after Rome were caused by people being so afraid, they buried their gold. Contemplate the following. Gresham's Law is really just a mathematical statement of mankind's nsatiable inability to resist interest rates which are higher than the growth rate of production.

(1) See http://ShadowStats.com. It is a self-evident fact that changing the weightings for the basket of goods in CPI changed the result percent. It is an "Enron-like" accounting gimick. From mid-1980s to early 2000s, some things (e.g. gas, Asian manufactured goods) were declining or fairly flat in price, while others things (e.g. healthcare, housing, education) were rising at 10+%. By re-weighting and using other statistical tricks (e.g. hedonics), the official CPI was reported several percent lower than the actual basket of goods that matter most to people. For example, if 80% of one's economic net worth is tied into the price of their house, and housing prices were rising nearly 10%, then the individual sees the CPI at 3% (and thus interest rate at 5% cost) lower than his gain.

Disclaimer: The above are my personal opinions. I seek safe harbor. I am not a professional advisor. I am not responsible for anything anyone does after reading this. Seek your own counsel on all matters.

Shelby Moore, III
Editorial Archive

Contact Information

Shelby Moore, III Davao City, Mindanao, Philippines | Email | Website