Gold

I am currently on the sidelines for gold. I understand that our short term environment supports deflation, but believe inflation is around the corner. In most cases the FED seems to have direct influence on inflation, but thats not the case when banks won't lend. I'd guess fractional reserve banking is the major source for inflation, and as long as banks aren't lending and the economy is crumbling, deflation will rule the day. However, the FED is currently pumping obscene amounts of money into the banks who seem to use it only to buy treasury notes and don't use it as a base for lending. My strategy for gold will be to monitor lending activity and go long as soon as lending has resumed a historical pace. I'm not too sure on what to watch to gage whether lending is flowing again though. Ted spread? What do u guys think?
 
[quote author="upperlowerclass" date=1225145732]I am currently on the sidelines for gold. I understand that our short term environment supports deflation, but believe inflation is around the corner. In most cases the FED seems to have direct influence on inflation, but thats not the case when banks won't lend. I'd guess fractional reserve banking is the major source for inflation, and as long as banks aren't lending and the economy is crumbling, deflation will rule the day. However, the FED is currently pumping obscene amounts of money into the banks who seem to use it only to buy treasury notes and don't use it as a base for lending. My strategy for gold will be to monitor lending activity and go long as soon as lending has resumed a historical pace. I'm not too sure on what to watch to gage whether lending is flowing again though. Ted spread? What do u guys think?</blockquote>


You are right that the inflation is right around the corner.
 
[quote author="PANDA" date=1225148540][quote author="upperlowerclass" date=1225145732]I am currently on the sidelines for gold. I understand that our short term environment supports deflation, but believe inflation is around the corner. In most cases the FED seems to have direct influence on inflation, but thats not the case when banks won't lend. I'd guess fractional reserve banking is the major source for inflation, and as long as banks aren't lending and the economy is crumbling, deflation will rule the day. However, the FED is currently pumping obscene amounts of money into the banks who seem to use it only to buy treasury notes and don't use it as a base for lending. My strategy for gold will be to monitor lending activity and go long as soon as lending has resumed a historical pace. I'm not too sure on what to watch to gage whether lending is flowing again though. Ted spread? What do u guys think?</blockquote>


You are right that the inflation is right around the corner.</blockquote>
That would mean that the economy gets back on its feet...aint happening for at least 18-24 months.
 
[quote author="awgee" date=1225146912][quote author="upperlowerclass" date=1225145732]I am currently on the sidelines for gold. I understand that our short term environment supports deflation, but believe inflation is around the corner. In most cases the FED seems to have direct influence on inflation, but thats not the case when banks won't lend. I'd guess fractional reserve banking is the major source for inflation, and as long as banks aren't lending and the economy is crumbling, deflation will rule the day. However, the FED is currently pumping obscene amounts of money into the banks who seem to use it only to buy treasury notes and don't use it as a base for lending. My strategy for gold will be to monitor lending activity and go long as soon as lending has resumed a historical pace. I'm not too sure on what to watch to gage whether lending is flowing again though. Ted spread? What do u guys think?</blockquote>


Honestly, I think that by the time any signals are deemed in place, it will be too late.</blockquote>


Tru, also I could get caught watching lending activity while the dollar bubble pops. If t-notes are selling en masse it won't matter if banks are lending or not, USD index collapses and gold/oil resume the uptrend. There are just too many triggers that can set inflation off. Maybe I shouldn't fret so much on the timing, but just make sure I'm in it before the first domino falls.
 
Inflation is not the issue. Nor is it likely to be ant time soon. Last week the emerging markets and some developed markets are moving quickly to shore up their currencies. In excess of $75 Billion of USD were net sold against EM currency last week alone. As the overhang of dollars continues to unwind, so do does some of the pressure on USD inflation. The near term will be dominated by continued deleveraging and realignment of global imbalances vis-a-vis the dollar. Both trends mean lower domestic inflation.



This reality is being reflected across markets including TIPS BEIs, commodities prices, and USD appreciation against every currency except the JPY (which is also on the path to normalization).



Within that framework inflation hedges are less important in the near term, though perhaps offering a compelling entry point considering the longer term will likely be driven less by the current imbalances and resultant correction and more on the unavoidable consequences of runaway spending of future dollars ($50+ TRILLION in Medicate and SS liabilities). Add to that the resumption of the EM growth story and the resultant upward pressure on commodities, and higher inflation is not only certain but in all liklihood beyond the ability of the Fed to control (lacking direct coordinated support from central banks around the world).
 
Panda, I fixed your link:



<a href="http://www.321gold.com/editorials/moriarty/moriarty102708.html">Even Gold Can't Hedge a Nuclear Implosion</a>



Panda, just use the <a> button to insert links.
 
[quote author="freedomCM" date=1225171757]is platinum really down to the same price as gold? how can that be?</blockquote>


Fear of slowdown in automobile sales. Autos use platinum for the catalytic converter.
 
[quote author="CapitalismWorks" date=1225152857]Inflation is not the issue. Nor is it likely to be ant time soon. Last week the emerging markets and some developed markets are moving quickly to shore up their currencies. In excess of $75 Billion of USD were net sold against EM currency last week alone. As the overhang of dollars continues to unwind, so do does some of the pressure on USD inflation. The near term will be dominated by continued deleveraging and realignment of global imbalances vis-a-vis the dollar. Both trends mean lower domestic inflation.



This reality is being reflected across markets including TIPS BEIs, commodities prices, and USD appreciation against every currency except the JPY (which is also on the path to normalization).



Within that framework inflation hedges are less important in the near term, though perhaps offering a compelling entry point considering the longer term will likely be driven less by the current imbalances and resultant correction and more on the unavoidable consequences of runaway spending of future dollars ($50+ TRILLION in Medicate and SS liabilities). Add to that the resumption of the EM growth story and the resultant upward pressure on commodities, and higher inflation is not only certain but in all liklihood beyond the ability of the Fed to control (lacking direct coordinated support from central banks around the world).</blockquote>


Inflation is easy to control: cut off the supply of dollars. The only reason we don't have inflation now is due to the rapid deflation occuring in all asset classes and all commodities. When it's done, there will be a period of relative calm before inflation resumes due to the massive amount dollar out in the world. What the Fed and Treasury have done, they will undo (see Volcker, ca. 1981) and you will see massive destruction of the money supply until 1-2% inflation is possible and maintainable.
 
[quote author="ukyo116" date=1225176139][quote author="freedomCM" date=1225171757]is platinum really down to the same price as gold? how can that be?</blockquote>


Fear of slowdown in automobile sales. Autos use platinum for the catalytic converter.</blockquote>




even given that, it can't last, can it? isn't platinum much more scarce than gold?



i always thought that the historical price relation was 2.5:1





is this a good long term play?
 
[quote author="Astute Observer" date=1225195679][quote author="freedomCM" date=1225182217][quote author="ukyo116" date=1225176139][quote author="freedomCM" date=1225171757]is platinum really down to the same price as gold? how can that be?</blockquote>
Fear of slowdown in automobile sales. Autos use platinum for the catalytic converter.</blockquote>
even given that, it can't last, can it? isn't platinum much more scarce than gold?

i always thought that the historical price relation was 2.5:1

is this a good long term play?</blockquote>
Platinum used to be junks left over from copper and gold refining process. No one want this until in past few decades. Same for other metals in the same series. In addition to the use in catalytic converter, it is also heavily used in petrolum rehydrogenation process (cracking, I think) and other catalytic process such as oil dehydrogenation and fuel cell. All these processes relies on the price of the raw materials, and so in next few years, the demand is projected to decline considerably.



I am sure we won't see as many catalytic converter thieves like we used to.</blockquote>


I think its interesting in that car sales have no doubt slowed when we look at the United States. But when we look at countries like China, more buyers have been coming onto the market.



And they haven't been buying small cars. They've been purchasing SUVs. So I believe there is a long term play possibility there if you believe the China growth story and that they can sustain moving their population to have more of a middle-class appetite.
 
[quote author="ukyo116" date=1225202330]



And they haven't been buying small cars. They've been purchasing SUVs. So I believe there is a long term play possibility there if you believe the China growth story and that they can sustain moving their population to have more of a middle-class appetite.</blockquote>


That still won't affect platinum prices unless they signifigantly increase their emissions requirements. Now that the Olympics are over, I suspect their clean air efforts have been abandoned.
 
[quote author="PANDA" date=1225169325]



<a href="http://www.merkfund.com/merk-perspective/market-outlook/2008-10-23.html">Outlook On Gold: Buying Opportunity and Hedge Against Uncertainty Ahead</a>



Panda<blockquote>
 
[quote author="Nude" date=1225177893][quote author="CapitalismWorks" date=1225152857]Inflation is not the issue. Nor is it likely to be ant time soon. Last week the emerging markets and some developed markets are moving quickly to shore up their currencies. In excess of $75 Billion of USD were net sold against EM currency last week alone. As the overhang of dollars continues to unwind, so do does some of the pressure on USD inflation. The near term will be dominated by continued deleveraging and realignment of global imbalances vis-a-vis the dollar. Both trends mean lower domestic inflation.



This reality is being reflected across markets including TIPS BEIs, commodities prices, and USD appreciation against every currency except the JPY (which is also on the path to normalization).



Within that framework inflation hedges are less important in the near term, though perhaps offering a compelling entry point considering the longer term will likely be driven less by the current imbalances and resultant correction and more on the unavoidable consequences of runaway spending of future dollars ($50+ TRILLION in Medicate and SS liabilities). Add to that the resumption of the EM growth story and the resultant upward pressure on commodities, and higher inflation is not only certain but in all liklihood beyond the ability of the Fed to control (lacking direct coordinated support from central banks around the world).</blockquote>


Inflation is easy to control: cut off the supply of dollars. The only reason we don't have inflation now is due to the rapid deflation occuring in all asset classes and all commodities. When it's done, there will be a period of relative calm before inflation resumes due to the massive amount dollar out in the world. What the Fed and Treasury have done, they will undo (see Volcker, ca. 1981) and you will see massive destruction of the money supply until 1-2% inflation is possible and maintainable.</blockquote>


The Volcker era provides a false sense of security in regards to the ability of U.S. policy makers to manage inflation. Globalization, and the additional demand pressures that it provides mutes the ability of domestic action in regards to its ability to impact inflation. In your scenario the Fed will embark upon a money supply elimination program... this is HIGHLY unlikely. First, money supply did not fall even in the Volcker era (http://en.wikipedia.org/wiki/Image:Changes_in_US_money_supply_1960-2007.gif).

Second, as I pointed out, one player acting alone within the increasingly balanced global economic framework will be unable to accomplish much. Oil is a great example. Through the second half of 2007 and first half of 2008, despite falling demand from U.S. consumers oil prices surged. Only when it became clear that the EM bloc and the rest of of the developed market would not avoid the recession plaguing the U.S. did oil prices come down. Translating this experience toward inflation and montary policy, leads me to conclude that the U.S. will be increasingly impotent in regards to our ability to combat inflation.
 
[quote author="CapitalismWorks" date=1225235363]

The Volcker era provides a false sense of security in regards to the ability of U.S. policy makers to manage inflation. Globalization, and the additional demand pressures that it provides mutes the ability of domestic action in regards to its ability to impact inflation. In your scenario the Fed will embark upon a money supply elimination program... this is HIGHLY unlikely. First, money supply did not fall even in the Volcker era <img src="http://upload.wikimedia.org/wikipedia/en/a/a4/Changes_in_US_money_supply_1960-2007.gif" alt="" /> .</blockquote>
The amount of currency (M1) declined in the first few months of 1981. Your graphic also shows a decrease in the rate of growth which came in conjunction with higher Fed Funds rates, both of which kicked off a recession. Now, you can argue that the sum of all "money" (M3) did not decrease, but Volcker did cut the supply of hard currency in circulation.

<blockquote>Second, as I pointed out, one player acting alone within the increasingly balanced global economic framework will be unable to accomplish much. Oil is a great example. Through the second half of 2007 and first half of 2008, despite falling demand from U.S. consumers oil prices surged. Only when it became clear that the EM bloc and the rest of of the developed market would not avoid the recession plaguing the U.S. did oil prices come down. Translating this experience toward inflation and montary policy, leads me to conclude that the U.S. will be increasingly impotent in regards to our ability to combat inflation.</blockquote>
You are confusing monetary and price inflation. Oil is a commodity. Currency is not (aside from arbitrage trades) and the issuing country can control monetary-induced inflation with the flick of a switch. Not renewing repos, cutting the physical amount of hard currency, decreasing swap lines with foreign central banks are a few simple steps that come to mind. Prices may rise for things like oil, wheat, etc., as demand out paces supply but only until the two reach a natural balance point. That kind of inflation is beyond anyone's control, not just the Fed's. But domestic monetary inflation, the kind that most people really worry about, is very much under the control of the Federal Reserve.
 
Panda, never fight Mish.



<a href="http://globaleconomicanalysis.blogspot.com/2008/10/currency-crisis-meltdown-in-europe.html?ref=patrick.net">http://globaleconomicanalysis.blogspot.com/2008/10/currency-crisis-meltdown-in-europe.html?ref=patrick.net</a>



Currency Crisis Meltdown in Europe, Japan, Australia



"A funny thing happened to that US dollar crash nearly everyone told me was coming. It looks like everything but the Yen crashed instead, just as some deflationists thought."
 
I didn't realize that most people only worried about monetary inflation... Huh?!? People worry about all kinds of inflation regardless of source.



Commodities aren't the only thing that are likely to rise with global demand. Wages will also begin to rise, and in China they already are... We are beginning to see outsourcing from China to the Phillipines as evidence the China is no longer the low cost producer of labor. Apparently 25 years of active migration from the rural into the urban economy is beginning to reach a tipping point. The surfeit of cheap labor over that period has served as an anchor on global wages and finished goods price. Due to increasing endogenous demand, increasing wage pressure, and upward revaluations on the currency costs related to China are going to rise. The net result is that China transforms from a source of deflation into an exporter of inflation.



You are confusing domestic money supply with actual price inflation.
 
CW,

Price inflation due to increases in wages and demand is normal and desirable. Monetary inflation is destructive and reduces overall wealth. You made the statement that inflation is no longer controllable, and compared apples and oranges to make your case. I'm simply explaining that you are wrong and why. Since you seem bent on remaining wrong, I'll leave you to it.
 
Price inflation because of wages is "normal and desireable"? What about the dreaded wage-price spiral? First, I thought that was the death knell of an economy and the primary reason the 70's inflation was so horrible.



http://en.wikipedia.org/wiki/Price/wage_spiral



Second, Price inflation in never desireable if prices can simply remain stable. Modern thinking is that inflation is preferable to deflation, and seeking to maintain stable prices provides no margin for error in regards to slipping into deflation.



Please, if you are going to call me out as Wrong, help me out. I have never heard of the differentiation between normal and desireable inflation and bad inflation based on the driver of inflation (I have heard of normal low inflation and runaway bad inflation). If you have any links or support for this line of reasoning, please post a link.



Note we haven't discussed declining labor-productivity due to decreasing marginal benefit from outsourcing (see wage increases in China, etc.). This is a non-monetary source of inflation. Wages go up, but productivity remains constant (or at least fails to keep up with wage increases). Tell me again how that is good?!?
 
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