I have been told that I just don’t get it.  We are moving toward a deflation and this is why gold is “going down.”  The “deflationists” have come out of the woodwork, further below is just one e-mail that I received yesterday.  What is coming will be a monetary panic which hyper inflates the currency away.  When paper markets sell 50% of the world’s global gold production in less than 24 hours, yes the price will drop.  Whether the gold “will” get delivered or NOT does not matter today, it will only matter “later.”  If you cannot see that paper trading many times one year’s global gold production in one month can not only influence but in the short term “make” price…then no need to read the following.

I wrote the following two paragraphs at the end but would like you to read it twice so I will begin with it and finish with it.

Let me put this in layman’s terms.  Let’s assume that we do have a deflation.  This means that there are less dollars outstanding.  Less dollars outstanding means that the interest that needs to be paid on all bonds, all life insurance products and all bank accounts does not exist.  Not only does it not exist but won’t exist when the payments are due.  All banks, all brokers and all insurance companies then become instantly insolvent because they cannot pay their obligations and a selling frenzy begins to raise cash.  Then of course you have a federal government that must pay over $1 trillion per year in interest payments (not to mention trillions of dollars more in benefits). Since we are in deflation the Fed is no longer rolling Treasury debt over so the Treasury doesn’t have the funds to pay interest (let alone retire principal as comes due).  So…now you also have a Treasury that is insolvent.  …and what is that little term written that’s on all your dollars?  The “full faith and credit of the United States?”  So dollars, which are issued by a government that is insolvent, bankrupt, whatever you’d like to call it are supposed to become more valuable.  Oh yes, they will pay with tax revenues!  How much tax revenue will be coming in with a financial sector that has closed their doors because of too much debt and not enough dollars to perform interest payments…one that will crash in a nanosecond with the help of computerized trading? …And the last man standing?  Gold!  Why?  Because it “is.”  It “is” money that cannot and did not default while all of this so called deflation occurred.  Remember, deflation means less dollars outstanding so interest owed did not get paid out which collapses the tent.  In today’s world with the amounts of debt outstanding and with computers that can trade $1 trillion (in a “quadrillion world”) faster than you can blink your eye, how fast do you think it will take for the whole system to close down?

Do you really believe that true deflation can last longer than even 1 week?  Do you really believe that dollars will gain in value versus gold?  The only possible way that this could occur is if technology discovered a way to create gold (supply) faster than dollars (demand) are created.  With gold now below the cost of production I am pretty sure that this is not going to happen anytime soon!

I received this e-mail yesterday telling me that I don’t understand deflation…

Bill,

I’m afraid what most people who believe metals are the place to be for the fallout are forgetting that a weak economy combined with collapsing credit and rising yields is a very deflationary environment. As you yourself said, there is no method left with which to reflate.

In a deflationary environment all commodities are going down.

Just like in 2008 when a collapse of the financial system threatened a deflationary depression, commodities got hammered. Oil went to 24$ a barrel. Gold was at 300$ an ounce.

Unless you actually think Bernanke wins or tries to pull a Japan and ups purchases to 200 billion a month. This is a deflationary environment going forward and commodity prices will reflect that.

My reply was this:

 Ah yes, another deflationist! So dollars will be worth more? Dollars which are issued by a bankrupt entity? That are backed by the “full faith and credit” of that bankrupt entity? First off, gold only traded down to $696, not $300 in 2008. It did not fall as much as any other “commodity” because gold is not a commodity…it IS money. JP Morgan himself said “Gold is money, nothing else is.” In a true deflation, gold does better than anything else and deflation is THE best environment to own gold…even better than hyperinflation which is where the current fiasco will ultimately end up. “Dollars” only did well in the Depression because they were still backed by gold, a “surrogate” for gold so to speak. Were they not backed by gold they would have crashed and burned. We now live in VERY different times than the Great Depression.

I received another couple of e-mails from this gentleman where he says that dollars will get stronger and gold will go back to sub $200 (where it was in the year 2000 he said) and possibly even to $100 per ounce.  The current thrashing of the metals have brought them out of the woodwork, I have been called a “permabull” and even compared to (and doing the same disservice as) the likes of Jim Sinclair, James Turk and Eric Sprott.  First off, I am flattered to be considered or even my name mentioned in the same sentence as these three individuals.  As for being a “permabull?”  Well yes, I have been bullish gold and silver every single day since mid-1997 when gold broke below what I believed to be the cost of production.  I try to call bottoms, not tops because the ultimate top is many multiples of current prices.   Each year, month and every day since then (1997), “policy,” both fiscal and monetary have made the true values of gold and silver worth more in dollar terms.  The reasons to own the metals now are far more prevalent and far stronger now than they were since the bull market began in 1999.  I might add that the reasons are far more obvious.

As for the “deflation” argument, for the umpteenth time I will shoot it down.  In a fiat system where the central bank can create as many dollars as possible, “true” deflation cannot happen.  Can asset prices drop?  Of course they can, real estate can drop, stocks can drop, bonds can drop and so can gold/silver…for a spell.  Can the amount of dollars actually drop (the definition of deflation)?  Well yes, it is possible.  Will the Fed ever let this happen?  They cannot.  They cannot ever let this happen because it would be the end of the system and also the end of the dollar itself.  A system as indebted as the current one will immediately implode if credit (money creation) were to even stagnate much less shrink.  The problem is that dollars themselves would completely lose value if this were to happen because they are based on “credit,” more credit and EXPANDING credit to retain any value.

The world we live in today is not anything like the 1930s.  Back then gold and dollars were interchangeable.  Dollars “represented” gold holdings and were exchangeable for actual gold until 1932.  Once the “link” between the two was severed, dollars were devalued by 75% vs. gold.  So if you say that dollars did well during the deflation…you are correct but gold did far better.  Gold did far better because it “IS” money and dollars were only a “proxy” for money when in reality it was just a currency.  Today, are dollars money?  Just look up the definition of money in the dictionary or wash a couple hundred bucks 3 or 4 times in your jeans pocket and you’ll know the answer.  Dollars are a currency…and currency is to trade with, NOT save with.

What we face today is a deflation “in terms of gold” because it is being hoarded and taken off the market.  In fact, the more that COMEX sells paper gold to depress the price…the faster physical gold is being taken off the market and delivered into dark vaults worldwide.  Those who claim “dollar deflation” are missing the point that dollars themselves are the “bedrock” or the foundation for …yes…dollars themselves much like 2 drunks trying to hold each other up.  Can they “go up” in value for a while?  Yes of course.  Can the Fed ever pull dollars out of the system?  Not a chance, even the mention of “tapering” has caused a financial market hissy fit.

So now, I reiterate:
Let me put this in layman’s terms.  Let’s assume that we do have a deflation.  This means that there are less dollars outstanding.  Less dollars outstanding means that the interest that needs to be paid on all bonds, all life insurance products and all bank accounts does not exist.  Not only does it not exist but won’t exist when the payments are due.  All banks, all brokers and all insurance companies then become instantly insolvent because they cannot pay their obligations and a selling frenzy begins to raise cash.  Then of course you have a federal government that must pay over $1 trillion per year in interest payments (not to mention trillions of dollars more in benefits). Since we are in deflation the Fed is no longer rolling Treasury debt over so the Treasury doesn’t have the funds to pay interest (let alone retire principal as comes due).  So…now you also have a Treasury that is insolvent.  …and what is that little term written that’s on all your dollars?  The “full faith and credit of the United States?”  So dollars, which are issued by a government that is insolvent, bankrupt, whatever you’d like to call it are supposed to become more valuable.  Oh yes, they will pay with tax revenues!  How much tax revenue will be coming in with a financial sector that has closed their doors because of too much debt and not enough dollars to perform interest payments…one that will crash in a nanosecond with the help of computerized trading? …And the last man standing?  Gold!  Why?  Because it “is.”  It “is” money that cannot and did not default while all of this so called deflation occurred.  Remember, deflation means less dollars outstanding so interest owed did not get paid out which collapses the tent.  In today’s world with the amounts of debt outstanding and with computers that can trade $1 trillion (in a “quadrillion world”) faster than you can blink your eye, how fast do you think it will take for the whole system to close down?
Do you really believe that true deflation can last longer than even 1 week?  Do you really believe that dollars will gain in value versus gold?  The only possible way that this could occur is if technology discovered a way to create gold (supply) faster than dollars (demand) are created.  With gold now below the cost of production I am pretty sure that this is not going to happen anytime soon!