Posts Tagged ‘inflation’
Physical Gold or US Dollars?
You have a personal choice to make everyday as to how you keep your savings. Do you keep it in cash? Stocks or bonds? Do you keep it in a CD or in a savings account at the bank? Or do you keep it in physical gold? When you keep it in physical gold, in your possession, you have essentially removed your money from the system; a system in which you have no control, a system that is manipulated by central bankers and the federal government.
There is a fundamental difference between physical gold and paper assets (or digits on a screen). One is a physical piece of gold that has intrinsic value, and has had value for over 5,000 years. On the other end of the spectrum is wealth that is stored as digits in an electronic account in a computer system. If the dollar collapses only one of these is safe.
The way our government is treating the economy today is massively irresponsible. The more money the government prints, the more the value of the dollar is eroded. It has become obvious over the past few years that the irresponsibility has run rampant. From the dealings of Bear Sterns and Lehman Brothers to the failure of BP to buy a part that could have prevented the mess in the gulf. In the world we live in it has clearly become all about the money. Do you trust these types of people to have your best interest in mind? I think not.
If you own physical gold you are saying I don’t trust the government and the Federal Reserve. If you have money in the system you are supporting that system. Now I am not suggesting that you pull everything out and live off the grid, but I am saying that everyone should own some physical gold for financial insurance. Sure you will probably see great gains by many experts’ expectations, but it is more about protecting what you already have, and building wealth as secondary.
He who controls the assets has the power. Gold coins in your hand or numbers in your bank account, which one is safer? Which one will you choose? Weigh your options, do your research and decide for yourself what makes most sense.
New Gold-Backed Currency Could be in Use Next Month
It looks as though a northern state in Malaysia called Kelantan will be using a new gold-backed currency as early as mid-August. They won’t be the first state/country to be using a gold-backed currency; Indonesia has already minted a minimal number of pieces (25,000) to be used in Australia, Malaysia, and Singapore.
According to the Guardian, the states Islamist government is kick starting the currency by paying its government employees 25% of their paychecks with the gold dinar and silver dirham. To further strengthen the cause all state companies will be accepting the currency and over 600 businesses will be doing the same.
Gold-backed currencies are touted as the only way to thwart the central bankers around the world, stop inflation and stabilize the world’s economies. Many well respected financial analysts here in the US are calling for a gold backed dollar in order to do just that. A gold-backed US dollar could work if gold bullion was confiscated and the price was again locked in at a much higher price to be equal with the money supply. Some experts say that price would be anywhere between $3,000 and $11,000 per ounce, though I have heard some pretty extreme predictions as high as $47,000 per ounce.
The US was on the gold standard for many years until the Federal Reserve was allowed into our system in 1913. They have systematically eroded the purchasing power of the dollar through a series of events. First they removed us from the gold standard domestically in 1933 by confiscating all gold bullion and making it illegal to own gold. Then under President Nixon they removed us from the gold standard internationally in 1971 by closing the gold window, making it impossible for foreign countries to convert their excess US dollars to gold.
A new gold standard in the US would thwart the ability of the government to print money at will, thus impeding inflation and the erosion of private wealth. Inflation is merely a tax. The more something costs you the less money you have to spend on other things. Inflation shifts wealth from your pocket to the government’s pocket. Physical gold and silver bullion have proven to keep up with inflation over the years. Therefore everyone should have some in their portfolio.
Everything You Need to Know about Gold in Three Sentences
Richard Russell, a prominent financial writer, on July 8th wrote this:
“Fed Chief Bernanke will absolutely not accept deflation… Shrewd gold-accumulators are well aware of this. As the deflationary and deleveraging forces press on the US economy, the Bernanke Fed is ready to devalue the US dollar in its (whatever it takes) battle to hold back deflation.”
Russell sums it up in three sentences:
1. The Fed will not tolerate the growing forces of deflation
2. To combat the deflationary forces, the Fed will devalue the dollar by printing trillions more of Federal fiat money.
3. Once it is realized that the Fed is on the path to devalue the dollar, there will be panic to buy and own gold.
The key to what he has said is “once it is realized that the Fed is on the path to devalue the dollar.” Most of the general public does not realize that this is going on with intention. They don’t realize that every time the Fed prints dollars it devalues all dollars in the system through monetary inflation. It only takes 4% inflation for 17 years to cut the value of the dollar in half! When the general public realizes that the Fed won’t stop printing there will be a mass exodus into gold and the prices will go through the roof; simple supply and demand.
It should be obvious that the Fed hates deflation; they have been inflating the dollar since their inception in 1913. They do this by printing money. This process has been accelerated by the removal of the gold standard in 1971. The Fed can now print money without limitation, thus the reason the monetary supply has increased 2.5 times in 18 months. The deficits are increasing by an average of $4.7 billion per day. But people have become accustom to the inflation tax, so it is just normal.
The new pace with which the Fed is printing money will have massive inflation implications in the long-run and it will be impossible for people to ignore. Own gold now before everyone does. By the time everyone wants in there won’t be enough physical gold for everyone to own in order to protect what they have.
US Inflation Effect on Gold Prices
The simple definition of inflation is the printing of money. Those in the media, government and Federal Reserve would like us to believe that inflation is the rising of prices. Typically you will hear this described as “price inflation” rather than “monetary inflation” which more accurately describes what is really going on. According to the government, at this point inflation is not an issue. This is because the CPI does not include food, energy, and healthcare and makes exceptions for advances in technology; therefore the CPI is always grossly understated.
Why we haven’t seen significant “price inflation” yet is due to the fact that money is not being lent out. Banks have around $1 trillion in reserves held with the Federal Reserve. Credit has gotten much tighter, unemployment has increased and overall credit worthiness has declined. These set of circumstances has kept money on the sidelines of the economy. When this money floods the system we will most certainly see price inflation.
As far as monetary inflation is concerned we have seen an enormous amount of this here is the US. The M3 money supply has increased more than 10 fold since the 70’s and I have heard figures that the Fed has printed 2.5 times the money supply in the last 18 months with no signs of stopping. The Bush administration was running a deficit of about $1.7 billion per day, whereas the Obama administration is running about $4.5 billion a day. It took 204 years to create the first $1 trillion; we will create the next $1 trillion within the first seven months of 2010. This is a staggering amount of monetary inflation.
How does all of this affect gold prices? Gold is a hedge against inflation. In dollar terms gold has consistently proven to hold up to inflation. For example, 100 years ago an ounce of gold could buy a nice men’s suit, today an ounce of gold will still buy a nice men’s suit. So as price inflation heats up expect more people to jump on the gold band wagon. This demand will create higher and higher highs in the price of gold.
Jim Rickards said, “It is the case that real debt cannot be repaid through any feasible combination of growth and taxes.” Therefore the only option is to continue to print money which will lead to inflation, then hyperinflation and then collapse of the dollar. Gold will do progressively better in each one of these circumstances. So look for the rising gold trend to continue if for no other reason than the government is printing money at an alarming rate.
James Turk sees Gold at $8,000 by 2015
At the 2010 World Mining Investment Conference in London, James Turk opened his keynote by reaffirming his previous prediction that gold will reach $8,000 per ounce by 2015. He bases his predictions on past performance. When asked about where he thought gold would be by the end of this year he responded with $1,800 to $2,000 per ounce.
While his predictions are based on past performance the kicker is that he believes this price increase will be due to the debasement of the monetary system. Rather than an increase in wealth it will be gold keeping pace with inflation as the dollar continues to be printed and the debt continues to grow. He believes that physical gold and silver are the only real money and one true way to preserve wealth in this environment.
James Turk has one thing right for sure and that is gold and silver are the only true money. All currencies world wide have no intrinsic value. Gold and silver have no debt attached to it and are free from liens or encumbrances. Whether or not his predictions on the price will come true, well we will have to wait and see. Turk tends to be one of the more aggressive forecasters on gold prices.
What is the most concerning about his predictions is that the rise in the value of gold will be due to hyper inflationary conditions. That means that our wealth will not increase due to the rising value of gold (for those that own it) but only be maintained. All dollar denominated assets and fixed income products will lose value dramatically. So the message here is buy gold and silver in order to preserve what you have spent years building.
Gold as Alternative to U.S. Dollar
There is a lot of concern worldwide that the U.S. Dollar is weak and facing tumultuous times ahead. This concern is justified, as we have printed 2.5 times the money supply in just 18 months, and anytime in history when a government has turned on the printing presses to pump liquidity into the markets, eventually that currency inflates dramatically. There have been times in history where printing lead to hyperinflation and eventual collapse. The most famous example is Germany from 1919 to 1923 when gold went from 170 Deutsche Marks to 87 trillion Deutsche Marks. The most recent example would be Zimbabwe whose currency was inflating over 1 million percent a year until the currency died in April of 2009.
What is most interesting about the case of Zimbabwe is that we actually got to see what happened when the currency collapsed. Citizens of Zimbabwe began panning and digging for gold in rivers and mountains in the hopes of obtaining mere grains. They would then take this into the city and buy products with it. Gold as an alternative currency to the dollar is very viable option, and some would say the only viable option to fiat paper currencies. Gold and silver are both considered to be monetary metals and are a good option for bartering.
On this site we frequently talk about rare gold coins. But in the instance of bartering rare gold coins are not the way to go. Rare gold coins are typically used for growth in a portfolio which can later be converted to quantity if so desired. But under the circumstances of a currency collapse gold and silver bullion in small denominations is what will be most desired. The smaller the denomination the easier it will be to barter with. For example, if you have a 1 ounce American Eagle gold coin and gold has shot up to $50,000 per ounce because the dollar is worthless, it will be harder to barter with than 1/10 of an ounce worth $5,000. Now prices will have inflated along with gold going up, but I wanted to draw a picture in your mind.
Silver will be even easier to use as an alternative currency due to its low value. Bartering with 1 ounce of silver today with a spot price at $17.41 makes buying anything with that easy. It is prudent to have some barterable gold and silver in your portfolio.
Gold Breaks old record close of $1,218.30
On December 3, 2009 gold set a new record close of $1,218.30. Since then gold came down to the $1,050 range then ran all the way back up to break the record on May 11th, 2010. Gold’s last price that day was $1,227.40. Since then gold has hovered around that price never going higher than $1,240 and not lower than $1,225.
We are now in uncharted territory. There is no resistance on the top of gold so technically speaking we don’t really know how high it will go from here. Some experts are calling for $2,000 per ounce by the end of this year. Some more conservative estimates are between $1,300 and $1,500.
There are a few factors that are playing a role in gold breaking records. These are timing in the bull market, inflation and supply and demand.
We are only in the second phase of a three phase bull market so look to see higher and higher highs. New records will continue to come. However to compare the current record price to the $850 per ounce high in January of 1980, one must adjust for inflation. If we do that gold would need to break $2,300 per ounce to really be considered a new all-time high.
The dollar has lost much of its purchasing power since 1980 and look for that trend to continue. Some say that it is planned because it is the only way that our country can afford its debts. It only takes 4% inflation for 17 years to cut the debt (and the dollars value) in half. We all know that 4% inflation is pretty easy to achieve. As inflation picks up expect to see gold follow.
Only a small percentage of Americans own gold. As fears continue to mount amongst concern for the dollar and other fiat currencies, more and more Americans will acquire gold. This new demand will also contribute to higher gold prices.
Gold will be much higher than it is today before this bull cycle is over. Rob McEwen of U.S. Gold believes gold will hit $5,000 per ounce sometime between 2012 and 2015, and he is known for his timely predictions.
Fundamentals on Gold Remain Strong
The basic fundamentals that move the price of gold are supply and demand and dollar fluctuations. The price action on a daily basis can be measured in terms of predominant buying and selling of gold, and strengthening or weakening of the dollar.
Even though we are off of our most recent record gold price of $1,218 in December of 2009, the fundamentals for gold remain strong. Gold is one of the scarcest resources in the world. Mining output has increased as the bull market has raged on but demand has still outpaced the new supply increases. This has come from new investors and NGO’s (non-governmental organizations). In addition, foreign central banks have become net buyers of gold as of late, whereas before they had been net sellers for many years.
The World Gold Council said that “investor flows, specifically from western markets, have provided a key means of support during the course of the credit crisis as investors sought to diversify their exposures to other assets and protect their wealth against market shocks.” It is simple, demand is outpacing supply, and therefore the price of gold is rising, and has been for the past 9 years. The fundamental demand for gold continues to grow.
On the dollar side of the equation we continue to see the central banks around the world print money at will. This helps gold in two ways. The first way it affects gold is the more money that is printed the more fear it produces in citizens of that respective country. People become fearful of inflation or a collapse and want to divulge themselves of their currency. The more fear that exists the more demand there will be for gold. The second way that money printing affects gold is the more money that is printed the less that currency will be worth over the long-term. This is simple inflation, which can lead to hyperinflation which can lead to a currency collapse. As the value of a currency falls, the value of gold will rise in that currency.
Investment demand for gold worldwide is strong and the central banks are helping to fuel that fire. In my opinion they will continue to do so as it is the path of least resistance in addition to making debt easier to afford, and the world is deep in debt. So look for the fundamentals on gold to continue to show strength for years to come.
Dr. Marc Faber on CNBC
Dr. Marc Faber was recently seen on CNBC in a piece they called “Governments will Bankrupt Us.” Dr. Faber is editor and publisher of The Gloom, Boom and Doom Report and is a frequent contributor to CNBC. He states that he is extremely bearish on the world. The governments around the world are taking over in conjunction with inflating the monetary supply. The printing of money is a temporary patch to the economy which is giving us a bull market in stocks.
He further states that the bull market in stocks will continue for a while due to all of the stimulus, but in the end will ultimately bankrupt the sovereign nations. “If you print money like in Zimbabwe… the purchasing power of money goes down, and the standards of living go down, and eventually, you have a civil war,” he added.
Dr. Faber says that instead of holding cash people should gradually accumulate physical gold and silver. “Paper money will go down relative to precious metals. So in that environment, I think you…should all accumulate some gold.”
This is what I have been telling people all along. Whether the world collapses or not, everyone should own physical gold. Gold protects people from the effects of inflation and hyperinflation. Currencies, especially fiat currencies, fail. It is a matter of time before the U.S. Dollar will suffer the same fate. Dr. Faber is sometimes dubbed Dr. Doom, but he points to things that we should all be concerned about… Money Printing!
We have watched nation after nation throughout history take on this strategy and it always eventually ends in failure. Look at Germany from 1919 to 1923. The government was printing money like crazy. In 1919 one ounce of gold was worth 170 Deutsche Marks. By the end of it all in November of 1923 one ounce of gold was worth 87 trillion Deutsche Marks. So if you buried an ounce of gold and 170 Marks in 1919 by 1923 your gold would have maintained its purchasing power and your Marks would be worthless.
This type of money printing is disastrous for people with savings, and the U.S. government has increased the money supply by 2.5 times in the past 18 months. Buying gold is a great strategy to protect what you have spent years accumulating. If you do not own any start accumulating before it is too late. Get in while gold is still cheap.
http://www.cnbc.com/id/36704832/Governments_Will_Bankrupt_Us_Marc_Faber
The U.S. is in Danger of Hyperinflation
The U.S. Government reported a budget deficit of $220.9 billion for the month of February 2010. The government took in $107.5 billion and outlaid $328.4 billion. This is pretty staggering. We are on track to another $1 trillion dollars in debt in the first seven months of fiscal year 2010. To put $1 trillion dollars into perspective; if you stacked $1,000 bills tightly it would reach 67.9 miles high! I have read that even if the government taxed every American at 100% of their income the budget would not be balanced.
The federal debt is currently over $12 trillion and growing. With the currently low interest rate environment our interest payments on the debt are roughly 10% of tax revenue. As our interest payments increase in size the more of our tax dollars are taken away from other areas of spending. Consequently as rates will have to rise as inflation sets in, the interest payments on the debt could easily shoot up to the 25% range. Which means more borrowing, it is a vicious circle.
The current debt figure does not include Social Security or Medicare. Including these two items the debt is estimated by some experts to be somewhere between $55 and $80 trillion. The government is spending money that it doesn’t have everyday. It has become completely normal to do so. The more money the government has to create, the more inflation the dollar will see. Once all of these dollars hit the system inflation will tick higher and higher.
Inflation is when too many dollars are chasing too few goods. To make it simple, when no one wants dollars because they view them to be weak, they will spend them on goods today rather than wait until tomorrow. This speeds up the velocity of money (for an example of this look at Zimbabwe hyperinflation on youtube.com). The Zimbabwe government began printing money at will to cover their debts and this snowballed until their currency finally collapsed in April of 2009. Now their citizens are panning for gold just to buy food.
Foreign countries like China, Russia and Brazil have already begun taking measures to divulge themselves of their dollar reserves. If the U.S. continues on the path of printing money excessively, ultimately countries around the world will speed up this process. As these dollars come home to the U.S. inflation will pick up and possibly create hyperinflation. Those who own gold and silver have protection. If you look at the hyperinflation that took place in Weimar Germany from 1919 to 1923 you will find that an ounce of gold went form 170 Deutsche Marks to 87 trillion Deutsche Marks. Those that owned gold were able to buy essential items. Those that owned Deutsche Marks watched their wealth disappear very fast.