Deflation and the Gold Price Trajectory

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What happened last week?

The Great Correction gave notice: it’s not going away.

On Friday, the Dow rose 42 points. Gold advanced towards $1,600. Oil seems to be headed for $100.

With gold over $1,600, is it time to sell? Nah…not even close. It will have to go to $2,500 just to reach the high – adjusted for inflation – set 30 years ago.

But a lot of water has gone under the bridge in the last 3 decades. And almost every drop of it gurgles to us: Gold will go higher.

There’s much more debt than there was 30 years ago…and much more ‘funny money.’ What’s more, Paul Volcker is no longer at the Fed. This time, America’s central bank is run by Ben Bernanke…who has made it very clear what his response to crisis will be – print more money!

Yes, dear reader, gold is going higher. A lot higher. But not necessarily right away.

Harry Dent sent us the manuscript for his new book. He argues that gold will go higher…but not before it sinks. Debt is deflationary, he says. Everyone owes dollars. As debt is destroyed in the Great Correction the price of the dollar will go up and gold will go down. We will have deflation before we can move on to a super-boom, he believes.

He could be right. The markets always find a way to surprise us; you can count on that. But, by one route or another, gold will end up at twice today’s price – at least.

So let’s go back to see how the Great Correction is proceeding:

“Economy Faces a Jolt as Benefit Checks Run Out,” was a headline in The New York Times last week.

Europe’s debt market was melting down last week too. In all of the excitement, we overlooked this NYT item. But it is important. For two reasons. First, it shows the extent to which the US economy has been zombified. Second, it shows what happens when you let the zombies take over.

A large part of Americans’ income now comes neither from the sweat of their brows nor from the toil of their money. Instead, it is money that is given them by the government.

A large part of the population has turned away from profit-seeking, growth-enhancing work and towards zombie-ism, feeding at the public trough. And the more people who live at the expense of others, the less incentive the others have to bust their humps. Real GDP – the real wealth of a nation – goes down.

Then, the zombies get squeezed too. If you’re going to live at someone else’s expense, you better hope that he is doing well! But as the Great Correction continues and intensifies, zombie benefits run out…

Here’s the NYT article:

An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve’s program to pump money into the economy and the payroll tax cut, scheduled to expire at the end of the year.

In Arizona, where there are 10 job seekers for every opening, 45,000 people could lose benefits by the end of the year, according to estimates from the state Department of Economic Security. Yet employers in the state have added just 4,000 jobs over the last 12 months.

In a study for the Labor Department, Wayne Vroman, an economist at the Urban Institute, estimated that every $1 paid in jobless benefits generated as much as $2 in the economy.

If that last item is correct, could the reciprocal also be correct? Will withdrawing a dollar’s worth of benefits take $2 out of the economy? That’s what we’re scheduled to find out.

Stay tuned, dear reader…

And more thoughts…

“A man with a machine gun in his hands is a dangerous thing…”

The service at our little church in France began much like the service at our little church in Maryland – with misgivings.

In both cases, the priest marched down the aisle preceded by the cross and followed by flags. In both cases, – for the weekend of the 4th of July in America and the weekend of the 14th of July in France – church and state were muddled together ominously.

But while the US Episcopalian minister service seemed to think US forces were doing God’s work, yesterday, Father Henri issued a warning:

“Let’s recall what Jesus tells us about the bad grain. Yes, it gets sown. Yes, it comes up. But you are supposed to tear it out and destroy it.”

In WWII, he had little doubt who the bad grain was:

“The war was caused by Adolph Hitler and his Nazis.

“But there are bad seeds everywhere. They can show up unexpectedly. Here in our little community, too. We commemorate the day some 50 years ago, when a group of ‘resistance fighters’ took 24 people from the surrounding towns and murdered them in the woods close to here.

“You can say you’re fighting for this cause or for that cause. But the parable of the bad seed tells us to be careful. You could become the bad grain. And you will be sent to Hell. That’s what Jesus means…”

The French have seen more of war than Americans. They seem to like it less.

“The end of the war was a nightmare,” explained a neighbor. “The Germans pulled out…and the resistance took over.”

She lowered her voice and looked around her. “They were worse than the Germans. A lot of hooligans who became ‘resistance’ at the last minute. Many of them did so only to settle scores with their neighbors or to steal things from them.

“I was just a girl at the time, but I remember hearing the shots. I didn’t know what it was all about. My father was arrested. They claimed all sorts of things. When the case finally came to a judge, he dismissed it completely, because it was nonsense. But my father had to hide out for 3 years…and we didn’t know what would happen. Everything was in disorder.

“The local resistance – we knew them personally, they were our neighbors – came to our house and stole everything. Our animals. Our cars and tractors. We had nothing left. But we felt lucky. At least, they didn’t kill us. During this time about 100,000 people were killed in France. By other Frenchmen. It was a horror.”

When the bells tolled and the church service was over, we followed the honor guard – 8 old men, each carrying a flag. They furled the flags, got in their cars, and drove out of town. We followed…about 3 miles away…and stopped alongside the road. Then, the procession made its way on foot, about another half a mile down a muddy farm road.

“After the war, no one wanted to talk about these things…or hear about them,” our neighbor continued. “Nobody knew who was responsible for these murders. And no one wanted to find out. They didn’t put up this monument until the ’70s…and then people kept knocking it over.”

We finally came to a small clearing in the woods, with what looked like a gravestone in the middle. On it was inscribed only the names of three small towns nearby, from which the victims were taken.

There were about 20 people gathered in the woods. The leader of the old color guard put on a CD with some military music…flags were lowered. Then, he put on the French national anthem, the Marseillaise. Flags were raised again.

He explained:

“We are gathered here to remember…and to honor…the 24 people who were murdered in cold blood on this spot, in July of 1944. The crime was committed by a group of resistance fighters. Apparently, it was unauthorized. Two men were later tried before a court. They were found guilty, but only of theft!

“These poor people were named by the DeGaulle government as victims of the war…albeit under very special circumstances. They are ‘mort pour La France.’ We remember them. We remember too that we must never let something like this happen again. Let us have a minute of silence.”

Later, we met a woman whose father had been one of those murdered.

“Why was he killed? Because of jealousy. Envy. No one really knows. But our little town got a whole bunch of refugees from Alsace. That seemed to change the dynamics of the town. My father had a bakery. Maybe someone wanted it.”

Down the hill from the murder scene was an abandoned farm. The stone walls still stood, covered by vines, but the roofs were missing. There were three stone houses and a large barn. Below were the ruins of an ancient mill, with a grassy meadow in front.

“What a beautiful spot,” said Elizabeth. “You wonder why people would want to do such a terrible thing…what were they thinking? You can imagine it in a big city. I don’t know why. Awful things happen in big cities. You can’t imagine why people would want to kill their neighbors out here.”

“Bad seeds can take root anywhere,” we replied.

Regards,

Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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2 Comments on "Deflation and the Gold Price Trajectory"

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Freddy
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Gold bugs are always keen to compare prices of 30 years ago. Not so keen to go back a further 10 years.

You wouldn’t want to confuse everyone with the facts.

Wyman Kingsley
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Hi Bill, Love your column as I read it all the time, I completely respect your market analysis and value it considerably, but the interpretation of Jesus Word in this column is completely flawed as this is the area I study most and have learned its meanings by analysing the Truth of its parables. Highlighted below is an extract from the NKJV bible, by definition the harvest is when Jesus returns for the redeemed (wheat), those bearing His fruit filled with His Spirit (Refer also to the 10 Virgins parable) the tares as we know represent the wicked, but Jesus… Read more »
wpDiscuz
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