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July 30, 2011 – Comments (11)

Here is an update on my long term Gold chart. Again, simply look at a monthly chart and tune out all of the noise. Gold is volatile and the daily ups and downs are going to get worse from here on out. My advice: ignore them.

If you are a short term trader in Gold then I think you are the worst type of masochist. Why would anybody want to sit through the chop, violent ranges and reversals that would accompany Gold on a short term timeframe? There are so many easier ways to make a buck. If you are a Gold 'trader', then don't read my stuff (you probably haven't been anyways).


My fundamental stance on Gold is quite different that most Gold investors (I am sure there are similarities, but there are also more than a few differences). This has been my stance for some time:

"Is Gold a hedge against inflation or deflation?". The problem is in the way the question is phrased, as if it is only a hedge against one or the other. Many people assume that either inflation or deflation affects precious metals, and that's not it at all. The answer when I think about it is: neither.

Consider in the 1980s, we had massive inflation. But Gold had already begun a major decline. Why? Because Volcker's policies had brought stability to the markets. Monetary policy was in a bad place, but he was starting to get things under control again (at least in comparison to the previous 10 years). Gold can fall in inflationary environments. It can also rise in inflationary environments. It can both rise and fall in deflationary environments as well.

I have rejected the 'Gold is an inflation hedge' argument for some time and that is reflected in my writings.

The reason why Gold will continue to do well is because of uncertainty. We see states calling for austerity because they are insolvent, we see Congress calling for austerity under the (incorrect) assumption that the Federal Government is 'insolvent', we see policy makers in Washington clueless with how to deal with the situation, we see that when Washington does take action it is usually to affect Wall Streets best interests (repeal of Glass-Steagall in 1999 being one of the worst offenses), etc.

I have demonstrated that QE is not inflationary. There are many things that people call inflationary that aren't. And many people are also discounting the deflationary tendencies of consumers being in a balance sheet recession. There are a lot of deflationary headwinds. But, QE and other monetary polices of that nature causes instability. Not through 'money expansion', but by changing asset compositions (which creates a psychological backstop based on a misunderstanding of the mechanics): 'the Bernanke Put'. This is causing much more risk taking (look at the re-explosion of margin debt over the last year). This is highly unstable.

And so if Gold is a hedge against anything, it is against instability and against government decisions that are not in the interest of a smoothly functioning marketplace (policies that promote instability), regardless if the overall effect is inflationary or deflationary.

Gold has been monetary asset, or money itself, for thousands of years. This is why if anything is to behave as an anchor against instability, it is Gold. I am unconvinced that things have 'returned to normal', in any sense of the term. So I tend to think Gold will be in a bull market for some time. This doesn't mean the stock market will or has to crash either. I have shown through my long term Gold / SPX correlation charts that although Gold and Equities are mostly negatively correlated, there are significant periods of positive correlation. This is also why looking at Gold ratio charts is so informative.

11 Comments – Post Your Own

#1) On July 30, 2011 at 3:13 PM, kdakota630 (29.86) wrote:

My advice: ignore them.


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#2) On July 30, 2011 at 3:55 PM, outoffocus (23.66) wrote:

If you are a short term trader in Gold then I think you are the worst type of masochist.

I love it.  The same can be said with silver traders as well... Day Trade in a manipulated market? Do they also eat nails for breakfast?

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#3) On July 30, 2011 at 4:54 PM, Frankydontfailme (27.22) wrote:


I take it you don't care for the staid method of correlating gold price with world money supply?

Inflation or deflation don't matter on their own merits. It's the money supply..... along with the supply and demand of gold (of course). Uncertainty will encourage demand in the short term (I also predict much more uncertainty in the next few years). 

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#4) On July 30, 2011 at 9:20 PM, binve (< 20) wrote:

kdakota630 ,


outoffocus ,

Day Trade in a manipulated market? Do they also eat nails for breakfast?

Lol! Good one :)

Frankydontfailme ,

I take it you don't care for the staid method of correlating gold price with world money supply?


Inflation or deflation don't matter on their own merits. It's the money supply..

I very much disagree. I have come to disagree with much 'traditional' or 'standard' analysis. And correlating 'money supply' to inflation/deflation is one of those myths.

The problem with using any version of the money supply is that it lumps vertically and horizontally created money. I have talked about the difference those The very short version is that all transactions within the banking system are horizontal. This means that for every asset there is a corresponding liability generated. Which means the banking system by itself cannot generate *net* financial assets. The only way to generate net financial assets is by creating an asset with no corresponding liability. And the only entity that can do that within our monetary system is the US Treasury. It does so (spending money into existence) each and every day when it spends via crediting private sector bank account. Conversely, when the US Government taxes (money sent back to the Treasury) then financial assets are destroyed. Therefore the only way for the system to accumulate net financials assets is for the Government to spend more than it taxes. We express this accumulation as the national 'debt'.

The Fed cannot generate net financial assets, since it swaps reserves for assets that already exist. It does 'money printing' in only a literal and trivial sense. This would be different if the Fed started paying a remuneration rate, but they don't so I won't detail that complication right now. It can only swap reserves for existing net financial assets, and the only party that can generate those NFAs to begin with is the Treasury.

So, I metion all of this because 'money supply' analysis mixed both horizonal and vertical money and as such has no predicitve ability regarding inflation or deflation.

Consider the current failure of this type of analysis. "OMG!! The Fed added 1 Trillion in reserves to the monetary base! We are facing hyperinflation for sure!!". .... Where exactly is this hyperinflation? Nowhere. Okay, then where is the 'massive' inflation? Nowhere? hmm.....Why is that?

Because the Money Multiplier model is garbage. And even if it did work (which it doesn't) that all it would do was describe some mechanism of horizontal money creation (not vertical money creation). This means that the Quantity Theory of Money is also garbage.

The Fed could instead of swapping 1 Trillion of reserves for Treasuries, could swap 10 Trillion and the effect would be equally meaningless. Because monetary policy cannot be enforced strictly from the supply  (lending) side. In fact, the demand (borrowing) side of the equation is far more important. *BUT* even if the Fed could induce another lending boom right now, it would be completley horizontal. Which means it would lead to a private sector credit boom followed by a credit sector credit bust (just like 2002-2007 lending boom, 2007-20xx bust / balance sheet recession)

Monetary policy is largely worthless. It can cause all kinds of dislocations and malinvestment when inflation expectations are high. It is specatcularly ineffective when inflation expectations / borrowing demand is low.

So the Monetary Base leverering up to some 'money supply' theory through the money multiplier model is wrong. Looking at MZM, M0, M1 and M2 to draw inflation conclusions is wrong. Looking at M3 is a little bit closer to correct, but that is simply because it captures a large portion of net financial assets, so using it from a 'money supply' perspective is wrong.

Inflation (of the demand-pull variety) is caused by too much government spending when the economy is operating near full capacity (which hardly describes the current environment).

Inflation (of the cost-push variety) can happen independent of the government spending postion. But it is not driven primarily by the money supply, but by production control. See my thoughts regarding cost-push inflation in oil here:

I think trying to find trends in Gold based on those criteria is looking for correlation that won't tell you very much about causation.

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#5) On July 30, 2011 at 10:13 PM, HarryCarysGhost (99.74) wrote:

binve would you mind commenting here-

Silver Speculation

Your another investor whose opinion I respect, so I'd like to get your thoughts on that whole thang!

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#6) On July 30, 2011 at 10:50 PM, Frankydontfailme (27.22) wrote:

Binve, I re-read the links you posted and still don't fully understand cost-push versus demand-pull deficit spending. I apologize ahead of time as I'm sure I misunderstand you greatly.

First off, I get your point on monetary policy having no direct affect on inflation.

Here is how I understand your version of deficit spending:

Demand-pull deficit spending is not inflationary in the long run assuming it is used to productive ends that either a) increase efficiency and so result in lower prices or b) reduce the trade deficit. In the short term, however, the extra liquidity could certainly result in more currency chasing the same number of goods...(right?). This form of inflation tends to happen with near ful-employment, because otherwise the economy would  not be optimized (ie inefficient use of labor) and would inevitably result in waste (ie stagflation).

Cost-push inflation is caused by price setting (only?). For example, OPEC sets the price of petroleum (too high) and this results in higher prices of everything that directly or indirectly requires petroleum... which is everything. Couldn't this also be caused by more dollars chasing the same number of goods?

Do you completely deny the possibilty of excess liquidity (from the treasury, not the fed) causing higher prices?


Somewhat unrelated, are you confident that, say, China's monetary system is consistent with ours? If they are using their  reserves to purchase our bonds, but instead of of creating a liability, literally print yuan to make the purchase, wouldn't that result in more total worldwide liquidy chasing the same number of ounces of gold? As a result decreasing the effective supply of gold...




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#7) On July 30, 2011 at 10:57 PM, Frankydontfailme (27.22) wrote:

Nevermind on my last point, it seems that the chinese yuan are destroyed by the treasury. Interest payments on these bonds, however...

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#8) On July 31, 2011 at 12:12 AM, FleaBagger (29.42) wrote:

Can you explain to me how adding a large amount of fiat currency can possibly not change prices in that currency?

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#9) On July 31, 2011 at 1:34 AM, binve (< 20) wrote:

HarryCarysGhost ,

Thanks man! I will read that tomorrow and get you some thoughts.

Frankydontfailme and FleaBagger ,

I re-read the links you posted and still don't fully understand cost-push versus demand-pull deficit spending

No, I am referring to cost-push and demand-pull inflation. This is an important distinction because they manifest for different reasons.

First, let's tackle this point:

Can you explain to me how adding a large amount of fiat currency can possibly not change prices in that currency?

That is not what I am saying. Please read this post: This is the first link in comment #4. I unambiguously state that the trend in US inflation over the long term is directly related to the deficit spending position of US Government.

At any given time in the economy there are real resources for sale. All things being equal, more fiat currency for the same resouces => higher general prices.

My point with these comments is that things are not equal all the time. There are periods like the 1960s where the US was near full employment and the US economy was at full capacity and the unemployment rate was very low. When the oil shock created large instabilities, the large deficit spending in that timeframe caused massive demand-pull inflation.

This is how demand-pull inflation manifests. When the economy is near full capacity, resources (including and *especially* labor) are utilized fully, this means that any additonal money does not go to unallocated resources. Instead it just raises to competition for the already utilized resources thereby increasing prices across the board. Inflation in the 1970s was seen across nearly all components that make up the CPI basket.

That is *very* different from the environment today. We have relatively low utilization of resources, including and most especially unemployment (>9% official employment and closer to 30% underemployment), we have wealth concentrated in a few sectors (especially financials), sluggish economy, low core CPI. This means that the current deficit spending position of the US will not result in demand-pull inflation, which is exactly what we are seeing. Inflation is high for energy and food (which is cost-push inflation, see:, moderate inflation for healthcare (which is another victim of price setting based on policy decisions), low/no inflation for most of the other components, and *deflation* in housing. This very uneven inflation environment is telling us directly that deficit spending is not resulting in demand-pull inflation.

Again, my position and argument that inflation has nothing to do with the 'money supply' and has everything to do with deficit spending (and they are absolutely not the same thing). But simply deficit spending does not guarantee an inflationary envrionment, it very much depends on the utilization of resources in the economy at that time.

Do you completely deny the possibilty of excess liquidity (from the treasury, not the fed) causing higher prices?

Seriously? Please read this post again: First link in comment #4.

Somewhat unrelated, are you confident that, say, China's monetary system is consistent with ours?

No it isn't. At least not in how China is currently implementing it. China does not have a floating exchange rate, they have a peg. So they don't have full control over the dynamics of their system. It is a very poor policy decision and I have no idea what they are going to do about it.

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#10) On July 31, 2011 at 1:00 PM, Frankydontfailme (27.22) wrote:

I'm still confused Binve. If you've already clearly explained this, please post a link directly to the explanation or paste it below ( I've read all of your links and don't understand what 'First link in comment #4 means').

So we are clear: I understand that monetary policy does not directly affect inflation. I understand that reserves are not leant out etc.

On to fiscal policy. You claim that deficit spending can cause inflation, but only when the economy is nearly optimally functioning in terms of labor. You also claim that inflation can occur due to price setting.

I don't understand how there cannot be an in between form (stagflation). Is it possible that labor could be used inefficiently (high unemployment) and prices of goods could rise due to increased liquidy? To be clear I am defining liquidity as the amount of money in the economy, not the amount of reserves held in the monetary system. We are only looking at money in the economy. Congress passes a deficit, the Treasury obeys and prints money. This money is mostly used to fund the military, old people and other benefits. This excess money chases fewer goods (especially goods that people need most--- food and gas). This theory is not inconsistent with the deflation we notice in some sectors. People are deleveraging and so only spending on essentials. The more the government deficit spends the more these essentials go up. The rise in risk assets is unrelated to this and likely the cause of speculation (as you pointed out in a previous post).

Is your contention that this doesn't cause inflation because people are deleveraging and thus cancelling out debt? Couldn't this (in theory) be offset by enough deficit spending?

 Another point. Why is it that you believe oil prices are high due to price setting as opposed to peak oil production theory? We could be running out of cheap oil, and pumping money into the economy only to aggravate the more money chasing the same amount of goods. Since the cheap oil has already been skimmed off, it is becoming more and more expensive to harvest the energy source. This may be an argument for another day, I'm most interested in understanding how there can only be inflation in an efficient economy.

Sorry if I'm being obtuse :(

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#11) On August 01, 2011 at 2:52 AM, binve (< 20) wrote:


Please see this post:

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