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ChrisGraley (29.71)

Gold, Silver, Money, Inflation, Stagflation, Deflation, Hyperinflation

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June 06, 2010 – Comments (13)

OK this post is a little more advanced as far as explaining my thoughts go. I am by no means an expert, and I'm often humbled by other fools that seem to know things on these subjects that I did not, despite a concentrated effort on my part. I'm just gonna lay a little more down here in a blog post and let others dissect it.

GOLD 

My definition...

Not money. It's better than money. It holds it's value and money does not hold it's value. It's hard to destroy. We still pull more of it out of the ground than we consume. Even the gold that we consume can be recycled cost effectively a majority of the time.

SILVER 

 

My definition...

Not gold. It's better than gold. It's being manipulated more than gold. It's hard to destroy. We use it at a faster rate than we pull it out of the ground. It's cost effective to recycle in a few cases, but not in a lot of cases.

MONEY 

My definition..

Controlled by the State. What it's really worth depends on the state controlling it. It can be destroyed fairly easily and created fairly easily. The only reason that it has value is the the State gave it value. The only way it can maintain value is if others maintain confidence in the State.

INFLATION

My definition..

A devaluation of money caused by a lack of confidence in the State. It's good for debtors and bad for creditors. It normally spurs growth in the State if it can be kept at a controlled velocity. The price of that growth is a transference of debt from the current generation to future generations. It requires even more more inflation to be sustainable in the future.

STAGFLATION 

My definition..

A failure of the State to create jobs with inflation. This leads to fewer consumers with weaker dollars. It's bad for both creditors and debtors. Creditors make less money over time and debtors are fearful to spend or borrow because they fear losing their income stream.

DEFLATION 

My definition..

A decline in trust in lending money to a State. It's good for creditors in the short term and bad for debtors in both short and long terms. In very little time, debtors realize that borrowing money is a losing proposition and stop borrowing and creditors can no longer make money on loans. Creditors concentrate on collecting money from debtors that had contracts before deflation and productive money is pulled from the system.

HYPERINFLATION 

My definition..

TSJHTF! (The S*** Just Hit The Fan!) Hyperinflation is a secondary reaction to Inflation, Deflation, or Stagflation. It's a choice by the State to print themselves out of the problem when they really don't understand how big that the problem is. This leads to a lack of confidence in both the State's money and the State's credit. Most States that hit this point have to default on their loans and force deflation. The problem with this solution is that confidence from the outside needs a growing State economy and investment to grow the economy from the inside is hard to come by with forced deflation.

Gold vs...

Silver- Gold loses. Gold is not manipulated to the same extent. The Gold/Silver ratio favors Silver. The scarcity of Gold is going down while the scarcity of Silver is going up.

Money- Gold wins. Gold is stable, but money is not.

Inflation- Gold wins. The more that you try to prop the economy, the more that gold wins.

Stagflation- Gold wins even more! Gold = an accumulation of wealth as wealth is being destroyed.

Deflation- Believe it or not, but Gold wins here in the long term. The problem here is that most people don't want to buy anything today, when it will be cheaper tomorrow. Consumers don't think long term and eventually a currency has to get weaker to recover from deflation. Consumers hoard cash when the only path to prosperity is making that cash worth less tomorrow than it is today.

Hyperinflation- Despite what some gold bugs want you to believe, gold loses in this scenario in the long term. Hyperinflation requires you to immediately spend money when it hits your hands. The focus on survival makes other commodities more important than gold. Gold is valuable in terms of saving unspent money, but if you really experience hyperinflation, the other commodities become much scarcer than gold fairly quickly. Gold is good to prepare for hyperinflation, but once it hits, you need to buy guns, ammo and canned food. A rancher will not trade the last family cow for a wheelbarrow full of gold.

Silver vs... 

See the above for gold. Everything above applies to Silver too. Silver is better than gold in my opinion, because it's under-valued and can be used in smaller transactions. The whiplash effect will be higher in both deflationary and hyper-inflationary times. Silver stands a chance of people realizing manipulation as well. Silver can therefore increase on any given day despite what the market puts out there on the table.

If this thread becomes popular, I'll add 2 more posts. One will be specifically on PM theory. The other will be on global-economic theory. 

This thread is already long, but it's a small amount of info on the subject bouncing around in my head. I know that most of my posts are long and rambling. I know that somehow these posts get recced by a few people and trashed by a few based on politics.

Like it or hate it, it doesn't matter. If you think that I put my thought process out there and it helped you agree or disagree, then rec it. If you think that I have any agenda, then don't rec it.  I'm unpopular anyway, because I don't totally agree with anybody.

 

 Chris,

13 Comments – Post Your Own

#1) On June 06, 2010 at 10:15 AM, Robuh (24.35) wrote:

Yo Chris, I wish I had the time to really get into this but I'm sure others will. I pretty much disagree with everything (surprise, surprise) and I'm going to cherry pick.

GOLD - It holds it's value and money does not hold it's value

Over obscenely large periods of time Gold holds its value. When looking within the lifespan of a human being from the planet Earth it fluctuates wildly compared to whatever cost-of-living index that interests you. It is a great investment at times and a lousy investment at other times.

MONEY - The only reason that it has value is the State gave it value

This is exactly the same argument for the non-industrial holdings of Gold. I can find no meaningful use of gold other than the hope that someone else will buy it from me at a higher price because they find some value in it. I cannot consume it in any way nor can anyone else I would barter with. The use of gold as a store of value completely depends on everyone accepting that it's valuable.  I'd rather have ammunition or drums of gasoline in a warehouse somewhere because I know that people find that inherently valuable and I could barter with them.

INFLATION - A devaluation of money caused by a lack of confidence in the State

This is a complex topic but it's an increase of money supply in the system usually due to low-interest lending policies or periods of great growth. There has to be counterparties to take on the obligations associated with accepting this money unless you really believe in black helicopters dropping money from the skies.  There are elements of speculation/credit confidence in the Forex market and things can get stupid but it is by no means the only factor.

INFLATION - It's good for debtors and bad for creditors

Regular inflation is bad for neither because the creditors would charge an interest rate appropriate for the inflation rate of the time and the debtors need money at a fair rate.
If you're talking about inflation that exceeds lending rates then it can be really bad for the debtors because a) it's difficult for them to get credit in the higher interest rate environments that follow and b) their debt load in the future will kill them when inflation eventually abates.  Debtors never really get off the hook in the life, it just seems that they do.

DEFLATION - In very little time, debtors realize that borrowing money is a losing proposition and stop borrowing

This gives people too much credit. A "sane" person would never carry debt at an 18% interest rate but look at the people that maintain balance on their credit cards. They'll also buy some new device today that they could get for 30% less if they just wait for a year until the new model comes out. Dumb people will always act dumb with their money.

DEFLATION - Believe it or not, but Gold wins here in the long term

I keep on reading this and have absolutely no idea where people come up with this. There is no historical proof to back this up. Any analysis of gold holdings in a deflationary environment occurred while on the gold standard where money was tied to gold. In this type of environment, by law, gold had to increase in purchasing power.

Now that gold is just another commodity it would very likely fall in price with everything else. And before anyone starts commenting that the recent price moves of gold relative to other commodities proves their point, please don't. There are many current factors that are causing this including rampant speculation. Gold has done extremely poorly within periods of our lifetimes and there is a very good chance it will do so again.

Always good debating with you Chris

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#2) On June 06, 2010 at 10:34 AM, Teacherman1 (56.12) wrote:

Gold had done very well in my lifetime, but I wouldn't touch it at these prices.

Being an "Old Dude", who by pure dumb luck bought "KRand's" beginning when they were first available, I own all I want.

I would be more likely to sell it than buy it today.

If we get to the point where I start "to buy guns, ammo and canned food", maybe I can use it to help keep the door blocked when the younger, meaner, stronger and more desperate come to take it all away from me :).

Good arguments on both sides, and either one could be right.

Thanks for the effort you both put into them.

Have a good weekend. 

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#3) On June 06, 2010 at 12:20 PM, binve (< 20) wrote:

Chris, Excellent post my friend!!

I think this is nicely thought out from a pragmatic / turning something conceptual into something actionable viewpoint.

I really like and very much agree with your "gold vs." conclusion. I also totally agree that gold will not do as well in hyper-inflation than other say. I think gold does *the best* in stagflation. And since I think that is the most likely option, gold is by far my largest holding (with silver being a close second). 

Thanks for another great post!!.

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#4) On June 06, 2010 at 12:55 PM, portefeuille (99.60) wrote:

I cannot consume it in any way

you can eat it (in small amounts of course).

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#5) On June 06, 2010 at 12:55 PM, SockMarket (42.06) wrote:

excellent post!

-- and good counter arguments

I would point out that inflation usually comes from an increase in the money supply, rather than a drop in confidence in the state (see the US 1790-1965, excluding the civil war); a drop in confidence would probably lead to hyper inflation (although I suppose it depends on how severe and fast the drop really was). 

And that inflation occurs at normal interest rates and medicore growth, not just low rates and strong growth (robuh).

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#6) On June 06, 2010 at 1:35 PM, Robuh (24.35) wrote:

Teacherman1
I too was an accidental investor in gold/silver years ago and got very lucky. Eight years of trying to understand the PM markets have made me less "exuberant" than I once was.

danielthebear
Inflation does happen with normal interest rates and mediocre growth but less severely. I was actually referring to high inflation relative to target rates but point well taken.

Drops in confidence can have significant effects (as we can see with the Euro today) particularly for countries with large trade imbalances. However, as you correctly pointed out, its more often about money supply. I really don't see hyperinflation as  a reality for the United States given all of their advantages and available options but that seems to be an unpopular opinion around here.

Owning gold just does not make sense to me and I've put more than my fair share of thought into the matter. It doesn't make sense to a lot of smart people. Unfortunately there is a level of irrationality in the world that can defy common sense for extremely long periods of time. Its often more important to understand current sentiment rather than try to make rational choices. 

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#7) On June 06, 2010 at 2:32 PM, HarryCarysGhost (99.68) wrote:

 If you think that I put my thought process out there and it helped you agree or disagree, then rec it.

Chris while I may not always agree with you, I always rec your posts.

And since you "won" the jobs number contest I went back and recced 3 of your recent posts and 2 from Feb 2008.

Reading your posts has put SLV and SLW on my permament watchlist  

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#8) On June 06, 2010 at 4:13 PM, fewl10 (< 20) wrote:

Good definitions.

I like a lot of Karl Denninger's stuff, but I want to openly call him out on gold as "not a safe haven."  Of course he never does tell you what he thinks is the real safe haven.  Dollars?  Ha ha.  You gotta be kidding me.  The USD is a greater safe haven than gold?  Or any precious metal for that matter?

Again, I think DENNINGER gets a lot right, but on this one point, he's an absolute idiot.  He's a total chicken little, and thinks USD is the safest place to be.

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#9) On June 06, 2010 at 5:30 PM, Teacherman1 (56.12) wrote:

Of course it's in the bank.

My house could get broken into anytime. All they would find is the usual junk, and a couple of really big, really mean dogs to keep them company while the police respond to the alarm.

In the meantime, my wife would be using them for target practice.

Was that post supposed to scare me?

A "good hacker" can find out who anyone is. 

I notice you have no information in your CAPS profile. 

If you will post your email, I will send you my address and save you the time and trouble.

Have a nice day. 

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#10) On June 06, 2010 at 10:40 PM, ChrisGraley (29.71) wrote:

Thanks for the reply Robuh and here's my response.

Over obscenely large periods of time Gold holds its value. When looking within the lifespan of a human being from the planet Earth it fluctuates wildly compared to whatever cost-of-living index that interests you. It is a great investment at times and a lousy investment at other times.

The price of gold is reactionary in the very short term and open to speculation, but the price of gold is market driven. Any reactionary moves that it makes are based on perceptions of something else in the market being out of whack.


This is exactly the same argument for the non-industrial holdings of Gold. I can find no meaningful use of gold other than the hope that someone else will buy it from me at a higher price because they find some value in it. I cannot consume it in any way nor can anyone else I would barter with. The use of gold as a store of value completely depends on everyone accepting that it's valuable.  I'd rather have ammunition or drums of gasoline in a warehouse somewhere because I know that people find that inherently valuable and I could barter with them.

But the state does not give gold value. The market does. In a global marketplace, there is always someone that takes the other side of the trade. Let's say that we have Deflation. Our currency has to increase in value against someone else's. The demand for Gold goes up for them as the demand for gold comes down for us. They want to hedge their risks as much as we do. Now as far as the magic meaningful use for gold, it literally stops time. The moment that I buy a gold bar, I no longer have to worry about inflation until I sell it. This means that I am able to save while everyone else is forced to spend. Am I going to barter that bar? Probably not, unless I get a good deal. What I will do is go down to a gold dealer and sell it and go straight from there and make my purchases.


This is a complex topic but it's an increase of money supply in the system usually due to low-interest lending policies or periods of great growth. There has to be counterparties to take on the obligations associated with accepting this money unless you really believe in black helicopters dropping money from the skies.  There are elements of speculation/credit confidence in the Forex market and things can get stupid but it is by no means the only factor. 

You're right, it is a complex issue and it would have been better for me to have said "confidence in the State's money". But growth by itself would only cause inflation in the most extreme cases when the velocity of money is increased. You are right that more money has to be created for inflation. The result is always that your money is worth less to me today that it was yesterday though.


Regular inflation is bad for neither because the creditors would charge an interest rate appropriate for the inflation rate of the time and the debtors need money at a fair rate. 
If you're talking about inflation that exceeds lending rates then it can be really bad for the debtors because a) it's difficult for them to get credit in the higher interest rate environments that follow and b) their debt load in the future will kill them when inflation eventually abates.  Debtors never really get off the hook in the life, it just seems that they do.

Regular inflation (I think you are meaning controlled inflation here) Is actually bad for both. It makes the value of your current money worth less in the future. That means that you have to come up with an increase in productivity to offset the future decrease in your spending power. What do you think would happen if you maintained the same amount of money over a long period time and had the same productivity increases?


This gives people too much credit. A "sane" person would never carry debt at an 18% interest rate but look at the people that maintain balance on their credit cards. They'll also buy some new device today that they could get for 30% less if they just wait for a year until the new model comes out. Dumb people will always act dumb with their money.

Sure there are always stupid people out there, but that item in this case isn't going to be cheaper next year, it's going to be cheaper tomorrow and even cheaper the next day.

I keep on reading this and have absolutely no idea where people come up with this. There is no historical proof to back this up. Any analysis of gold holdings in a deflationary environment occurred while on the gold standard where money was tied to gold. In this type of environment, by law, gold had to increase in purchasing power.

History can't help with this one.  You are right to point out that gold was tied to the dollar in our last deflationary experience, but if I were around back then, I would have invested in gold miners. They had a set price for the gold they were pulling out of the ground and their costs were dropping like a rock. We also had no where near the institutional investors that we have now back then. So where does investment money go? Well a lot of it disappears and causes more deflation, but the rest has to be invested somewhere. The smart thing to do is to keep it in cash, but are you going to keep it Dollars? Euros? If deflation has already hit, what's the risk of a State printing themselves out of the problem?  Is that cash going to be kept at a bank? Is the bank still going to be around next week? Are stocks safe? Bonds? I suppose that you could buy a bunch of farmland if you are a fund manager and run it until the economy turns around, but do you know anything about running a farm? And what will other states do if the US tanks? What will China do? Ever heard of buy low and sell high? Well the biggest foreign holder of US dollars will be at a point where those dollars will never be worth more to them than they are now. They could do a huge amount of domestic spending, but they will likely already be experiencing high inflation. Selling dollars for more growth could put them into hyperinflation. What could they buy that would store wealth over the long haul? Gold will go down, but will it go down as much as other commodities? Will it go up at the same rate when the market rebounds?

Now that gold is just another commodity it would very likely fall in price with everything else. And before anyone starts commenting that the recent price moves of gold relative to other commodities proves their point, please don't. There are many current factors that are causing this including rampant speculation. Gold has done extremely poorly within periods of our lifetimes and there is a very good chance it will do so again.

Well I kind of agree with you here. There are many different factors effecting the price of gold including speculation, but the large number of factors are reactionary to abuses by the State. I disagree that Gold is like every other commodity. I buy Gold or Silver for 3 reasons.

1) To store wealth if I feel there is a dilution of money.

2) To react when I feel that the market is wrong about the price.

3) I just got married.

If I bought frozen concentrated orange juice or Adzuki beans for anything other than reason #2, I'm probably in a lot of trouble. I also agree that Gold will do extremely poorly in our lifetimes, but hopefully I'll be able to see that time coming well ahead of time.

It was very good debating with you as well. I appreciate a well thought response without malice. 

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#11) On June 06, 2010 at 11:32 PM, SockMarket (42.06) wrote:

robuh,

that is very true of high inflation. I would tend to agree about hyper inflation, especially considering how little inflation we are having at the 0 bound!

 

and chris,

congrats on your marriage!

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#12) On June 06, 2010 at 11:33 PM, ChrisGraley (29.71) wrote:

Teacherman1 Have you looked at gold adjusted for inflation? Not the real inflation numbers, just the drivel that the government expects you to believe. The real numbers paint an even better picture for Gold, but the fake numbers are scary enough to make me invest.

binve Thanks as always my friend and also thanks for validating my thought on gold during hyperinflation. I thought I was alone on that.

danielthebear  That's poor wording on my part. By "drop in confidence", I meant that I think that your dollar isn't worth as much today as it was yesterday. 

I agree with the second half of your post as well. An interesting thing to think about is what would happen if you kept the money supply constant, but had steady increases in productivity. Could you actually have deflationary growth? I would assume that you would suck currency away from other States, and savers would be rewarded handsomely, but how would it effect investing?  Your investment would make less dollars in the future, but those dollars would be worth more. Anyway, I'm starting to get way off topic. 

msftgev Thanks, but you don't have to rec my posts unless you think they were valuable. You can totally disagree, but if you got something out of it, and that something is that I'm completely and totally wrong, I'm fine with that. Some of my best investments came after reading a book and deciding that the author was an idiot. That idiot made me a lot of money so he has value to me.

fewl10 I think that a lot of highly paid hedge fund managers are unsure where the safe haven is right now, but I'm hoping that when everyone is in doubt, they choose the historical safe haven.

Teacherman1 There are a few safer places to store it than in a bank. I shall not post them here, but if you are interested let me know. I have about 1/3 rd of my Silver holdings in the US. The place that I put it is safer than Fort Knox in my opinion. Another 1/3rd is in Canada, again in a pretty safe place and it can't be confiscated by my government. The last 3rd is in Switzerland. This is kept by a bank, but A bank that I trust. It will be one of the last banks to fall if there is a crisis and I have a bunch of time to move it if I need to. The plan was for me to have some Silver here at home, have some out of the country but in driving distance, and have some close to where I'll be if all hell breaks loose.

portefeuille  Technically, that gold could be recycled.

Thanks again everyone. 

 

 

 

 

 

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#13) On June 07, 2010 at 12:28 AM, ChrisGraley (29.71) wrote:

LOL daniel, I didn't just get married.  But if I did, could you imagine the wrath if I came home with Adzuki beans.

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