Hard Money Inflation: Oil and Gold Continue to Plunge Downward
The day was off to a good start: Crude oil fell as much as 2 percent to $112.75 a barrel. Platinum plummeted $125 to $1,365 an ounce, its gravest intraday loss since Sept. 25, 2001. And gold fell as much as 4.2 percent to $772.98 an ounce.
That’s a loss of $260 per ounce and 26% off the March peak.
Commodities overall have now lost 21 percent in value from the record they posted on July 3. That means one thing: Welcome to the commodities bear market of 2008. Soon, you might kiss goodbye to inflation, to the American export boom, and maybe even to husky middle-aged urbanites on Huffys, pedaling to work in overstuffed bike shorts and sweat-stained gray t-shirts.
But let’s not get ahead of ourselves.
The pundits who credited inherent economic weakness in the U.S. economy for the rise in gold prices are now blaming the North American and Western European economic malaise for its decline. It must be great to have a one-size-fits all explanation.
The long-term effect of this rapid decline in an asset that has been sold as a hedge against devaluation in currencies and inflation is yet to be seen, especially in emerging markets. Gold supposedly is “real money”. But like fiat currency out in the real world, it sure has some “real inflation” to deal with. And due to the far lower income levels, that “hard money inflation” hits especially hard in emerging markets like China.
Consider this: Just two weeks ago, the Chinese papers were polishing their collective nails on their lapels reporting that “the per-capita disposable income for Chinese urbanites increased 14.4 percent to 8,065 yuan ($1,182) in the first six months over the same period in 2007.”
This is the emerging Chinese middle class, mind you. The ones with money. The ones most likely to buy gold as an “investment.”
In other words, these people just watched their $1,033 ounce of gold — representing their annual disposable income — decrease by $250… a whole three months worth of work. I am almost certain that the bragging rights of “having bought gold below $1,000″ (as pronounced by Howard Ruff earlier this month) will do preciously little to their sense of self worth… or indeed their net worth.
Nor will it foster confidence in further buys.
After all, gold’s drop makes even the renminbi — China’s PPI rose by a 12-year peak of 10.1 percent in July — look like Maine coast granite by comparison.
Disclosure: none.
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This article has 6 comments:
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Stephanie
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16 Comments
Aug 17 08:53 AMAmberger has no clue, does he?
I'm going to say it again here. Just love copy and paste, don't you?
Notice that the media makes little mention of gold prices on upswings, forget silver, and yet mentions gold when it takes a hard hit. Also note that bull markets always NEVER go straight up. There are ups and downs as markets overheat and back off a bit to blow the steam off, and then recover again and keep going. It happens to shake off the weak, speculative hands to restore the foundation to a more sensible level. Blowing the froth off, as it were. And bear markets NEVER go straight down, either. The US stock market has been experiencing bear traps, especially when you take in consideration inflation.
Now, I will add that the deflation argument has some weight. I was just thinking about it the other day last week. "Deflation... Deflation... How would that happen?" Well, I realized that it's taken decades for the total markets to build up to well over $500 trillion (including the derivatives markets). You have hundreds of thousands, okay, maybe millions of people (or parties) involved in these transactions. How many employees do the Feds, FDIC, Freddie Mac, Fannie Mae, Ginnie Mae, HUD, etc. have altogether? Maybe a few thousand. How many of those people are the actual decision makers that will get the wheels moving to bail out all these defaulted parties? One person can't move fast enough to cover the activities of 1,000 other people. Heck, I can't keep with anything more than 5-8 people in the clothing department's fitting rooms! It's a matter of velocity. Which number is moving faster? The rate of money creation to bail out people, or the rate of debt collapse? I'd bet on the debt collapse at this point.
If you have money (credit) supply collapsing like this, then prices on most services and goods at some point will drop, I mean drop way down. HOWEVER, this is what you have to watch out for. People will at some point scramble for gold and silver because it will be the only thing they can trust (after seeing their bank accounts wiped out, their retirement accounts gutted, ad nauseum). If you have, say $900 gold and $0.94 gallons of water, and things deflate to say, $250 gold and $0.20 gallons of water, then gold still has more purchasing power at $250 than it did at $900, only assuming that it will indeed happen like this and prices drop uniformly across the price index. It's not done once the price collapse occurs. The demand for gold and silver would take off, and prices would have to adjust to account for this.
Know this - no single fiat currency has survived intact in human history. Not the Ancient Roman debased currency, not China's first fiat experiment, not the French Assignat, the US Continental Dollar, the Union Greenbacks, etc. Read up on how the public responded with a flight back into gold/silver or something tangible each time it happened. Gold/silver has a history of being money for several THOUSANDS of years.
And I'm going to throw in that at a coin shop last week, I saw $12,000 worth of silver being bought by TWO people, and that's in Houston, an area not strong in gold/silver ownership. I have one former coworker who has silver, ONLY because he was given silver as an anniversary gift by his father-in-law. NOBODY else talks about it there. Only two or three out of 120 people in my life talk about it or are even curious about it. On the other hand, I had about 3-4 people at work alone with any money talk about real estate, how great it was, and that it always goes up, and that was in 2005-2006. I had already seen the writing on the wall by mid-2005 when I noticed that dogs and cats became homeowners as well. This is not happening among the general public in the US, and this used to be a market where everyone had at least some silver change in his pocket or her purse!
Good luck!
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Sidj
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25 Comments
Aug 17 09:40 AM-
Stephanie
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16 Comments
Aug 17 11:49 AM-
CaptBob
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198 Comments
Aug 17 12:59 PMTheres not enough Viagra in the universe to even get the dollar off the floor to the "flaccid" stage "Hard" cannot be used in the same sentence--in-any context.!!
The Chinese middle class?? Where do you put this puzzle piece???
A guy in a repressive Communist regime who just cracked $5,000 a year is going to save GM???
We're all in the same pot--cooked!!---Please pass me a carrot Woo Fat!.
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User 30121
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340 Comments
Aug 17 06:29 PMcaptbob...you are just too MAHVALOUS for words!
...just keep seeking out gold/silver for your safe(s). I am, and soon we ALL will be smiling....
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Stephanie
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16 Comments
Aug 18 09:41 AMThanks 30121.
About the deflation thing. I just realized that probably the reason we have inflation right now is so that the Feds can slow down the rate of deflation so it doesn't destroy as much as it would if it were not impeded, but it will get to a point in a few months when deflation finally bottoms out, and watch out! At that point, the Feds might ramp up inflation because then, the money supply will be able to expand at a faster percentage rate than it can today, even without deflation (as it would be much smaller then than it is today). Hyperinflation, maybe?