First Deflation then Inflation, Phase One & Two

People wonder why gold is not already say $5000 (it certainly could be) right now, given the fact that the US Fed alone and the US treasury have either given directly or bought (or guaranteed) up to $20 trillion USD worth of world bad debt/bonds/CDS/derivatives, you name it. That money went to US and European and other world banks and financial institutions into a literal rat's nest of opaque levered multilayered contracts and leverage…

Jumping Ahead

It would seem that the gold price should simply reflect all that money that was thrown out there, no? Answer at this stage? No.

Ok if all that incredible amount of money (and we are only talking the Fed at the moment, not the Chinese, the Japanese, nor the ECB all with say at least another close to ten $trillion USD worth, meaning in their own currency but we just use the USD to compare the amount here) they all threw into the flames….

Flames is a good analogy. What happened is this…They are attempting to keep alive a world awash in debt and all that money is merely being used to cover huge losses at financial institutions…which are basically like zombie banks now…and all the while the public funds are being depleted at a rapid rate. Ultimately at the end of the day, all those trillions, which would have been far better spent say, paying off the total of US mortgage debt, like Iceland did, which would have caused a total resurgence of the US economy.

But they threw this money where it would not reach the general population. And since the general population is who accounts for the 70% of US GDP - i.e. consumption, and not only a few millionaires and billionaires, all that money was wasted…. Thus, clearly that money was literally burned, but with the cost of levering all the public governments and ultimately will cause interest rates to rise drastically. Ultimately. But the US has some time yet….

Phase Two

Phase one is debt deflation and money destruction. Gold is representing this situation perfectly, merely reflecting the inflated price of gold since (I am picking a date here) of about a 3 to one price hike in all goods and services (or make it 4 now) since 1980 when gold peaked at say $870 then dropped after Volcker raised US interest rates briefly to roughly 20 pct. which slammed US inflation which started in earnest after the oil shock…We have already discussed what phase one of a debt crisis does above. Let's discuss Phase Two…I know these paragraphs are a bit dense but I like to write short concise stuff at times.

In Phase Two, after the central banks have realized that they have attempted to monetize the entire book value of the world markets (Probably Greenspan's Gambit which is not well understood, where he stated he wanted to fight the next Great Depression, and probably thought he could simply monetize the markets in total and do a restart without an economic collapse) they will then have to start simply massively increasing public assistance and or direct aid to the rebelling and suffering populations. At this point, inflation starts up again and interest rates start rising, rapidly. In this scenario the UST rate could jump from say 2 pct. on the US ten year, to 5 in a matter of months or one year. Gold at that point will double.

Inflation will start to appear in all things, particularly oil and food. A sort of downward spiral which is self reinforcing will further contract the economy, the attempts to maintain all debts of all kinds will fall by the wayside, and people will focus on shelter and such only. The same will go for the public sector debts.

How close we are to phase two, and gold spiking to first say a jump from $2000 to $4000 is hard to say. But gold is headed there. In the meantime, the world is caught in an economic debt deflationary cycle, and until phase two is reached will meander between $1500 and $2000 for 2012, with the exception that a Mid-East war would probably spike oil, and possibly gold over $2000. But gold has a few problems there because oil price hikes cause economic contraction so that is a bit complicated.

Anyway, we forecast gold to range from $1500 to $2000 for 2012 back in Winter 2011, and have been right. We also caught the last gold price collapse from near $1800 this year by two days warning subscribers. We also predicted the USD rally last year April 25, 2011 by about one or two weeks' notice, and no one I know of did that.

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Copyright 2012

Chris Laird

There is more to say, and we at PrudentSquirrel track gold, and currencies and commodities, with a generally weekly in depth newsletter and you can stop by and have a look at www.PrudentSquirrel.com

Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.

Copyright 2012