Gold Forecaster
- Global Watch
Gold will gain from both
the liquidity supply for stable money creation and to prevent
money shrinkage
Julian D.W.
Phillips
Gold Forecaster snippet
Sep 3, 2007
Many, many times we have opined
that the Fed would not fight inflation at the expense of growth
and that proved true last week. This concept permits a measure
of inflation and it permits the issuance of money headed overseas
to promote world growth [paying for imports], called 'stable'
money creation. But as we are all aware the over-issuance of
money [supplying more than necessary to provide just the right
amount of the medium of exchange to make the economy [global
as well as local] function with stable prices, has now had a
long history one likely to get longer too. If it were simply
to facilitate global growth, there would have been no reason
to doubt the value of money. But the temptation to print too
much has caused the gold bull market to be steadily on the go
since 1999. With recent events pointing to inflation and or
uncertainty, it is set to continue for a long time. The issuance
of liquidity should promote stable money expansion, but it has
gotten out of hand.
Over issuance has set off two
dangers: -
1) Asset bubble bursts, where
prices have over inflated, then burst sending asset values plummeting
[equaling the disappearance of money].
2) Deflation where prices drop
[again equaling the disappearance of money].
If these are on a small scale
the two can be coped with. But if they are on a large scale
they threaten not only growth, but cause a slide down towards
depression. This is where confidence in money and the Central
Banks issuing it play a key role.
Falling confidence can lead
to consumers saving, not spending and that is deflationary.
When consumer's credit becomes suspect, then the institutions
behind them become suspect in the eyes of other institutions
as well. [A month ago professional finance people would have
laughed at that possibility] When this second type of money
deflation sets in Central Banks, defensively, have to issue money.
The word defensively must be emphasized, because if they don't
deflation really takes off. Of course, such deflation feeds
on itself, so when new money arrives to combat it, it causes
prices to rises as well, prompting the need for an even greater
supply of it. This prompts further price rises - greater need
for money - price rises and so on until Central Banks have to
allow runaway inflation eventually leading to hyperinflation
or see a collapse [such as can be seen in Zimbabwe today] and
was seen in the Weimar Republic after the first world war. [Subscribers
- please ask for a copy of our essay on this]
Last week saw the beginning
of the second type of liquidity supply, the overtly defensive
supply by the Fed and the E.C.B. Unless they can restore underlying
confidence in the system as well as the $, they will have
to repeat such measures as the loss of confidence results in
the starvation of liquidity.
What makes this defense so
critical is the concept of syndication. When a bank wraps up
a parcel of dubious mortgages, collateralizes them [adding their
name to it] and issues shares in them to their subsidiaries and
clients, they lay off their bets [syndicate] by selling portions
to several other banks. Eventually banking in this way becomes
like a spiders web of shared risk. So a shock at one point sends
waves throughout the banking system as we saw last week. So
if more Fed/E.C.B. defense is needed it has the potential to
actually break confidence and rocket deflation and loss of confidence
in the entire structure of the economy. The delicacy of such
confidence building makes this the most difficult task a Central
Banker can face.
If it precipitates the need
to supply huge doses of liquidity supply, which are confidently
accepted [if only out of relief] then the cycle will begin as
we described above and growth may be maintained, but the threat
of a depression will sit in the wings constantly. However,
the task of fighting inflation will then become impossible.
Global cost
In a local context
such hyperinflation can be contained and stopped, because the
government has full control of the situation locally. Additionally
there is always an underlying reason that permits hyperinflation
in the first place, but with the global economy fragmented by
a host of separate national interests that make up the global
economy, this is not the case, hence the greater danger.
If excessive defensive doses
of liquidity are injected, not just inside the States, it will
have to be matched overseas as we saw in Europe when the E.C.B.
also defensively issues Euros. As this happens surplus holding
nations will seek to either quarantine themselves from the local
impact of the $ [reverse capital control as we highlighted in
last week's issue where China is permitting $ proceeds to be
kept offshore] or to switch out of them. They will also encourage
international trade to be priced in currencies other than the
$. Both moves spell disaster for the $'s role as the global
reserve currency.
The impact on Gold and Silver
Well before such inflation
takes off, the value of the $ will plummet. As it is the globe's
pivotal currency, on which all others are in some way dependent
for the stability of their currencies, the infection will spread
and undermine the entire global money system. This is where
the meaning of gold and silver as "safe-havens" will
be properly understood. It is in this climate as doubt and
uncertainty grows that gold and silver investments really prosper.
By this we don't expect gold and silver to become "mediums
of exchange", but on the one hand, they will be preservers
of value and on the other, confidence builders in paper currencies
under stress [as important reserve assets].
Before that happens now, the
dust has to settle on the present crisis, institutions have to
take stock, re-strategize, then focus on the way forward [with
precious metals in more favor than before].
Last weeks confidence crunch
was the beginning of gold and silver's rise, and it will go on
as long as doubts are thrown at the monetary system and the global
Balance of Payments.
Gold and silver will reflect
the decay in steadily and sometimes dramatically rising prices.
This was badly put, let me re-phrase that, gold and silver
will reflect the decay of the $ and its value, taking more cheapening
dollars to buy gold or silver. Those fortunate enough to have
gold or silver [this is where the physical stuff is more precious]
will have an element of security that will take them through
the dramas coming soon.
Please subscribe to GoldForecaster
for the entire report.
Aug 31, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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