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Saturday, February 21, 2009

Hyperinflation And Phantom Finance


The world is going mad. The gold price briefly touches $1000 yesterday, and yet demand for the metal is collapsing, other, that is, than in Gold Exchange Traded Funds, which claim to hold tonnes of the metal in warehouses of unspecified location. They refuse to permit anyone, even their own auditors, to see any real metal. (See 'Is GLD ETF really worth its metal? HERE).

The reason, however, the ETFs and their numerous media supporters claim that people should be buying their phantom gold in the first place is the coming of the dreaded 'hyperinflation'.

So let's have a quick look around see where this hyperinflation is located, seeing as we cannot find any gold anywhere.

Shares are tanking. Commodities are tanking. Wages are tanking. Prices in shops are tumbling. Yes. That sounds like hyperinflation is a real problem right now. These geniuses are clearly onto something.

But please, anyone interested in maintaining just a modicum of rationality, just sit back in your chair and start again. It is not hyperinflation which is the problem we are faced with. It is the exact opposite - deflation. Look at the 40 year chart of Treasury Bond Yields and see how longterm these trends are. There is not going to be a sudden new hyperinflationary beast stalking the earth - at least not for quite a while, and then only if governments go completely mad.

The only modern day country that faced hyperinflation was Germany in the 1920s and that was caused in part by the terms on which they surrendered in WW1, where huge Reparations were demanded by the 'Allies' to force Germany to pay for the war they had caused. OK things can happen and history can repeat itself. But let's at least make a clear-headed statement of 'where are we now?' first before we set out objectives of where we need to go next.

The answer is we are locked in a deflationary environment. Why don't we deal with that first before engaging with an imaginary hyperinflationary beast, who hasn't even made a guest appearance on the planet for three generations...except in Zimbabwe. Now if I was in Zimbabwe, yes I would buy some gold. But really I would actually be buying US dollars as they are a lot more easily converted, and are not subject to the volatility that gold is.

Just look at the bargains in the stock market shortly to be on offer, once shares are down another 20 or 30%. You don't follow the herd to make money. You buy when everyone else is selling, and you sell when everyone is buying.

Gold will tank next once the hyperinflationists calm down and face deflationary reality. They should sell their gold now, and get ready to buy shares if money-making is their goal. But they seem more fixated by their belief that hyperinflation will come and eat them all up, like the Big Bad Wolf in Little Red Riding Hood.

Gold ETFs offer phantom gold to deal with the phantom threat of hyperinflation. There seems to be a whole new subject for study at college - Phantom Finance And Its Inexplicable Appeal.

UPDATE 22nd February 2009 - Deflation - How It Can Be Stopped.

8 comments:

Anoneumouse said...

Wrong

If we can learn anything from history, it is that a government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment of politicians and unfortunately, that is now the situation we find ourselves in today.

Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power (current situation). In an inflationary environment, when prices are kept high by excess liquidity (quantative easing), money wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys paper money wealth.

Jay Dee said...

Hi, I think FIRST OF ALL I should ask you not to advise. Sorry to say that - but I checked your reccomendations when gold was 750 usd.
Amd now comments:
You say:
here is not going to be a sudden new hyperinflationary beast stalking the earth - at least not for quite a while
Markets do not evaluate things "for a while" they evaluate risks and posssibilities to earn. Today it is crazy to buy gold. tomorrow in case of riots and real problems - it will not be possible to buy the gold. What price of gold wopuld be crazy? Current price is for you not reasonable. I might agree to certain extent (for instance in case that within next 2 - 3 months we see recovery, FED stops printing money et cet.). Bit the problem is the risk. Today investors see that the risk is high to bet for recovery. Majority will soon follow. Then next step. What governmants will do when real RIOTS APPEAR. You say govs should be mad to create hiperinflation. Do you think they will not be mad within next 3 months? UK is going to print money. So far it is positive even to announce. Others (pushed by public) wought follow.
I am not going to convince you to invest in gold. I would be happy to loose on my gold I have. I have skills that are precious in the normal market. But the reality is such - that I am afraid I will not be capable to sell my skills within 3 - 5 years. And this is the problem.

Anonymous said...

"Gold at $8000"
http://hotair.com/archives/2009/02/21/glenn-beck-the-end-of-america-is-nigh-maybe/

Now I know this show is not 100% serious and I am not taking it at face value ofcourse.. but there are a lot of people making the same claim recently (about gold).
Not that the gold increases in value, the dollar callapses in value.
Do you not think that is a risk, the way Obama is spending?

And what are the risks of the same for the pound? the BOE is printing money, and we haven't hit the floor yet, the governments forcasts are ridiculous so the debt is going to be much much bigger than expected.
Yet you don't seem worried about the pound, at least not compared to other currency

tapestry said...

I expected a few comments as I am stating the case against the current orthodoxy. Once everyone agrees a price can only rise it is then that it is more likely to fall.

JD - I recommended gold as a buy in 2007 and followed the logic of the rise. But once gold topped out at $1030 I have been recommending sell since 2008 to be sure that any readers were not following my recommendation to buy any longer. I have not bought into the hype which has driven gold back to $1000 and still do not. You could have made far bigger returns since October by shorting markets.

I am now ordering you to sell gold! The next few weeks will show that fast price rises in nervous times are dangerous places to invest your money.

My point about ETFs is that you are not buying physical gold anyway but long positions in the futures market. Someone else is buying the short side of the contract, and they expect to make money out of your buying long, once the price falls.

All commodities have fallen in price, apart from gold which is hitting a high point. The media have persuaded people to believe in hyperinflation when the risk is not hyperinflation but deflation.

The moves governments are proposing are to a. save the banks from crashing which seems sensible, and b. to ensure there is still cash around the system.

The return of activity (buying, selling, borrowing, lending) however requires something else, and that is confidence. That will come once all the problems are dealt with which will take time, and it will happen when people feel they are over the crisis. You cannot rush that process.

Anonemeuse, look at th chart.

tapestry said...

Anonymous, the debts in Britain are truly awful, I agree. But Britain has enough past history that people will lend the money to the British government. Let's face it. They lend to the Italian and Spanish governments!

Obama is making public statements of allocating money to bail-outs. These can be reduced and curtailed if the situation changes. Politicians love to sound as if they are doing things and have to seen to be doing so in a crisis. The proof of the management skill takes time - like the pudding, it's in the eating.

The dollar is rising, not falling and has been doing so all year. It continues to rise.

The pound has fallen from $2.11 to $1.43. It might fall a bit more. But as all commodities have also fallen, and many other currencies too, it is not the inflationary disaster that people imagine.

The hyperinflation story is all about the dollar collapsing. It hasn't happened yet. It's never looked stronger. Reality and the hype don't match and that is the point of my post.

It's phantom finance you are reading and being asked to believe.

Anonymous said...

tapestry, You said on a previous comments thread "I know disaster movies are great fun, but the real world is not nearly so entertaining."
As a response to people worrying about the future of the dollar.

Yet it is you who makes similar disaster type posts refering to the Euro. Perhaps justifably so.

But do you not think America will eventually have the problems suggested by the likes of Ron Paul 'if' they continue down the same path over a significent period of time. Or is Ron Paul totally off base in your opinion?

tapestry said...

I've been rumbled!

I look at America and see a bad situation certainly. Debts and falling asset prices. But in such an entrepreneurial culture, the people in the past have always found a way to turn failure into success. There is still phenomenal belief that the USA will find her way out of her troubles.

Europe or the EU is a new entity. There is no entrepreneurial culture, and Europe has a long history of finding ways to make monumental disasters out of what should have been the greatest start - getting there first.

Germany might stand tall and become a powerful democratic country acting as a force for good. But it will only do so outside the Euro and the EU.

The point I was making is that the USA is suffering from deflation, and not hyperinflation. If inflation reappears down the line, the government can cut back money supply, raise interest rates and so on.

Hyperinflation requires Brak Obama to become Robert Mugabe. It is likely he would be voted out before that happens.

As for Ron Paul, I never quite bought into him myself. But he has many admirers.

tapestry said...

I just boned up on Ron Paul from Wikipedia.

Ron Paul doesn't believe in a return to the gold standard incidentally, but that gold and silver should be sales tax free so people can use them as money if they wish.

Gold coins are sales tax free, I thought.

Cutting all government programmes, and abolishing the CIA sounds attractive, but with Putin and the Russians now fully active trying to destabilise South America, such organisations will still regretfully have a role to play. I think Ron Paul's heart is in the right place but he needs to be a touch less idealistic and a little more practical.

Cutting government spending is certainly going to be necessary as part of putting the US economy back on its feet. But not in a time of slump. It is better done during a period of growth.