17/05/2009 by Philinje.

Here is an excellent aummary of the reasons for gold will do in a deflationary environment:

http://www.gold-eagle.com/editorials_08/brochert051409.html

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15/05/2009 by Philinje.

Intuitively, it seems that all the money printing in the US will have an inflationary effect. At a high level, more dollars means lower dollar value and higher prices of assets. The last article I posted explains how this can still result in a deflationary bias, especially as regards government bonds. And in short, money moving out of bonds will to some extent move into gold, which benefits from lower dollar value as as a physical commodity as well as its perceived value as an alternative to money.

However, there are fierce arguments at present about whether we are facing deflation or inflation, mainly because it seems all the new money is not flowing into the economy. The worry is that we have entered a deflationary spiral, much like the Great Depression, and all the money printing is having no effect on this Kondatrieff Winter, in which the economy just gets sucked into a black hole.

I have read endless articles detailing both sides of the argument and providing precise definitions of inflation vs deflation. These are loaded terms, and commonly abused and misused. Inflation of money results in deflated dollars and higher prices. Often what is called inflation is really the end result, namely higher prices. De-leveraging, as we saw last October, results in spikes down of asset prices that can resemble price deflation, and of course house prices are dropping.

Inflation itself, as opposed to price inflation, is an increase in the money supply. This has been the general trend since early in the 20th century as fractional reserve lending mushroomed. Fractional reserve lending is the ponzi scheme that is the basis of modern economies - some capital is used as the basis for loans that far exceed the value of that capital. There is roughly 10 to 1 leverage, so at any time a bank could have on hand 1/10 the capital it lends out. And that is just the first step of the pyramid.

Today, banks are hoarding new capital in an unprecedented way. So this creates a lot of questions about what will really happen in the economy.

If you want to understand this in depth, I highly recommend this article:

http://www.gold-eagle.com/editorials_08/pollaro051309.html

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12/05/2009 by Philinje.

This article is the single best description I have found of the current situation, which is not just a crisis but an ideology:

http://www.gold-eagle.com/editorials_08/kutyn051109.html

Even if your eyes glaze over when you hear about debates regarding Keynes vs. Mises, this boils it all down to the basics, and answers the question of how gold will do in the case of deflation. Here it is reproduced in its entirety:

Keynes vs. Ludwig von Mises and the Death of Capitalism

John Kutyn

Recently, massive amounts of fiscal and monetary stimulus have been injected into the global economy by governments and their central banks incurring debt. With U.S., Asian, and British economies and financial markets showing some signs of stabilising, there are those that claim that we are witnessing a clear empirical demonstration that Keynesian demand management can stabilise the market economy and protect capitalism from its own excesses.

Keynesian thought claims that financial imbalances and an economic contraction that results from excess debt can be corrected by going even deeper into debt, with central banks now predicting the end of the current recession by the end of 2009.

Countering this view is the Austrian school of economic thought that holds that the problem of excess debt cannot be cured by additional borrowing, but requires a major recession that liquidates unsound investments. Given the extraordinary levels of debt in the global economy, Keynesians correctly point out that such an approach would not only devastate public finances, but that the resulting job losses, bankruptcies, foreclosures, and general loss of living standards would be politically and socially unacceptable.

The key question is whether Keynesian demand management will work, because if it does not, an Austrian style collapse will occur, only from a much higher level of debt with government finances destroyed by the Keynesian approach.

In the U.S., interest rates are at record lows, government loans and guarantees are now estimated at almost $13 trillion to deal with the recession, the central bank debt has more than doubled to $2 trillion, and it is estimated that the government fiscal deficit will be about 12% of GDP. It is only reasonable to expect that such extraordinary measures should have some positive effect.

Keynesians claim the ability to see “green shoots”, indicating that their way will save world capitalism. These “green shoots” are driven by ideology and not reality, and can only be seen by Keynesians. Housing starts, having collapsed from 1,823,000 to 358,000 is a “green shoot” because they have not collapsed to zero. A slowing in job losses, even as hours worked collapses at a 9% rate is another “green shoot”. Keynesians have even examined the nations banks to find even more “green shoots”. In spite of rising loan delinquencies, foreclosures, and falling asset values, Keynesians see the creative ability of banks to post profits by creative accounting as a sure sign that banks can use the same creative ability to withstand even greater loan delinquencies and foreclosures.

Housing re-sales consist 50% of foreclosed homes. With hundreds of thousands of foreclosures held off the resale market, with foreclosure filings continuing to reach record levels, and more than 20% of homeowners owing more on their house than the market value, foreclosures and falling house prices will continue to dominate the housing market. Yet even here, Keynesians have found another “green shoot”. One is truly amassed at the genius of Keynesians and their ability to find “green shoots”.

Keynesians have not only deluded themselves by a failed and illogical economic theory, but by leveraging the national economy to this theory, they are on the verge of destroying the capitalist economic system.

The Chinese are beginning to question the wisdom of the Keynesians. Perhaps they are now questioning the wisdom of American consumers going into debt to purchase Chinese goods so that the Chinese can purchase U.S. debt. The Chinese have expressed concern about the future value of this debt. They are calling for the end of the U.S. dollar as a reserve currency, and have recently established currency swaps with Argentina, South Korea, Hong Kong, Malaysia, Indonesia, and Belarus. The Chinese are adding gold to their official reserves, and pleading with the IMF to sell all their gold in order to increase gold reserves further.

The Keynesian’s rely on a functioning bond market to support their economic theory. There must always be someone willing to purchase government debt, no matter how much is required, and no matter how great the government deficit. Record low interest rates and $13 trillion in loans and guarantees have only resulted in a small slowdown in the rate of economic collapse. Take away the ability of the government to go further into debt, or raise current interest costs, and the economic collapse will accelerate dramatically.

The American economy cannot tolerate a stagnant or contracting state for very long. The economy does not generate sufficient cash flow to meet debt obligations, requiring strong economic growth in order to avoid a collapse of the bond markets. Should the economy not respond to the present stimulus, even the federal government may not be able to borrow. A collapse of the bond markets not only takes away the ability of the government to stabilise the banks and the economy, but the resulting high interest rates will bring America down both economically and politically.

Perhaps the Chinese sense this. In their quest for world domination, economic warfare may be cheaper and more effective than a military conflict. A fire-sale of their U.S. debt holdings at a time the U.S. needs to raise $3 trillion in new loans could substantially raise interest rates, and call into question who has the financial capacity and desire to invest $4 to $5 trillion in U.S. government debt.

To avoid an economic collapse, and prevent outside forces from taking advantage of it’s present vulnerability, America needs to fundamentally alter its financial system. This involves a controlled collapse of the commercial banks and the Federal Reserve Board. The creation of the means of exchange must be taken away from the commercial banks and Federal Reserve, and given to the Treasury. Money would be in the form of Treasury notes (T.N.). The first step would be to simply create sufficient T.N. to purchase all bank assets.

Bank deposit holders, no longer being able to use bank deposits as currency, would close their accounts in return for the T.N. the banks acquired in exchange for their loan assets. These T.N. would be held at banks established by the Treasury department with transactions occurring electronically. The Treasury now owns all debt obligations, presenting it with a number of policy options. One policy would then be to cancel all debt, and in a simple step solve the present debt crisis. Alternatively, all interest payments could be cancelled, with principle payments used to fund government operations, eliminating the need for government taxation. The commercial banks, no longer having any assets or liabilities cease to exist.

Having solved the debt problem and establishing a stable monetary base, America will be able to achieve economic prosperity unparallel in human history. This of course is too much for the Keynesians. They would rather go deeper into debt and continue their search for “green-shoots”.

Keynesians suffer from a severe case of self-deception. Not only do they not understand economic analysis, but also they do not have a clue about how the banking system really operates. Keynesians are firmly in control of the American government. Instead of altering the structure of the financial system and bringing about a controlled collapse of the commercial banks, they are providing unlimited public funds in a useless attempt to bail out the pyramid scheme known as commercial banking.

The case for owning gold is not driven by the fear of future inflation. As a general rule, debt repayments are deflationary in nature, while debt creation is inflationary. However, much of the recent debt created by the U.S. government has not been used to increase economic activity, but has been injected into the financial system. Public debt has been used to finance the losses of the financial system. This still leaves the economy in a deflationary bias, due to existing debt levels.

On one level, a deflationary economy is positive for the bond market, as it increases real interest returns. However, a deflationary economy results in falling cash flows and asset values, leading to debt defaults and write-offs. It is the collapse of the bond markets and commercial banks that will drive the price of gold. The Chinese appear to sense this. Keynesians will drive the American economy into the ground. The interesting question is whether the Chinese will take advantage of both Americas vulnerability and stupidity and act so as to accelerate the financial and economic collapse.

John Kutyn
May 11, 2009

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12/02/2009 by Philinje.

Everything you wanted to know but were afraid to ask:

http://www.galmarley.com/framesets/fs_keep_it_safe_faqs.htm

This information is from the founder of BullionVault. I must say I find BV to be more and more impressive, the more I learn about gold and how they structured their business.

BullionVault is a highly superior option to gold ETFs, which are themselves much better than gold futures, and somewhat better than gold e-money, and now I believe this is slightly better than holding gold or silver coins in one’s possession. You can read about all these options on the same site referenced by the link above.

Coins are the most reassuring form of gold ownership, and the risk of theft is low. Before I considered having physical coins in one’s possession as the most desirable form of ownership. However, I now realize that storage of bullion in an appropriate facility outside of one’s country is in fact highly safe, highly liquid and very convenient in case you have to leave the country you are currently living in. The one problem with coins is what happens in the event of your government making gold illegal - the benefit of being able to use coins for everyday expenses becomes diminished.

So a safe approach might be some gold and silver coins, and some BullionVault, then everything else is more or less short-term. If you want to be trading in and out, then vehicles like ETFs and futures are ok. Just be aware that these trading vehicles carry the same inherent risks that endanger the financial system generally. So they might go up in price, but things could get screwy when you were expecting to cash in.

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07/12/2008 by Philinje.

Folks, my trading career has recently been changed by an enormous discovery.

For years I have loosely followed  the commentary of one Ron Rosen, who provides charts with a most unusual notation. To understand the signficance of what I’m about tell you, first read this:

http://www.wilder-concepts.com/theDeltaStory.aspx

I ordered the book and it is life-changing. I’ve done lots of study of trading techniques, and this is totally unique. Welles Wilder is actually the guy that invented some of the common trading indicators used by technical analysts worldwide. So you should take what he has to say seriously. And he says up front this is different from everything else, and for good reason: Delta is the underlying order of all markets.

Anyone who wants to get into this deeply should order the book.  But there is also a service that pertains to gold, and that is the Ron Rosen group on the Delta website. It’s $30 per month, and I highly recommend it.

The format is a bit odd but very friendly. Basically, it’s an online forum where Ron and his partner Alistair Gilbert post their charts and analyses, then members comment and ask questions and give each other interesting tidbits. The charts are invaluable to say the least.

What Delta is, is a universal timing principle that applies differently to classes of commodities, stocks, currencies, and anything that is traded in a public market. Once you see it in its various forms, you will be astounded.

A quick way to get started with gold in particular is Ron Rosen’s Letter, which is presented in forum format.

http://www.wilder-concepts.com/rosenletter.aspx

Once you have dipped your toes, you might want to get the Delta book, and check out the range of things Welles Wilder offers. Included with the Delta Phenomenon is The Wisdom of the Ages in Acquiring Wealth and I also recommend that, though it is almost the opposite sort of thing.  Definitely something to give anyone, and especially young folks.

http://www.wilder-concepts.com/productsservices.aspx

I am not selling this stuff. This blog is purely informational and I am so gob-smacked by this (after using it with gold and gold stocks for the past couple months), that I had to say something.

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26/04/2008 by admin.

The long-awaited blog site.

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