At the real risk of being exceedingly redundant I will start off by reminding what Mr. J.P. Morgan said about gold which was that. “Gold is money, and nothing else is”. In the following article, Bernanke admits that gold is not behaving like a commodity. Other commodities, including silver – a metal that is part commodity and part historical money - are not reaching new all time highs while gold continues to poke higher.
The US dollar is strengthening because people are fleeing risk assets of all kinds – real estate, stocks, bonds, etc. They are going to cash to ride out the turbulence. Gold is also rising because people are beginning to remember that it is historically the only real money. As Mish says at the end of his article, even gold could get swept down in a real deflationary crash but such a dip would represent a buying opportunity, not cause to flee. IMO the mechanics of a potential gold price dip are twofold:
1) Gold is a store of wealth. If nobody has any stored wealth then gold has little purpose. If times get really hard then people pull from their savings to get by and that includes selling their gold if gold is where their savings are stored.
2) The gold market is infested with counterfeit gold/promises of gold/paper gold. Many people think they have bought gold by buying the GLD exchange traded fund (ETF) or by buying gold certificates from banks, etc. But in a real crisis all of these promises could evaporate and the people who thought they owned gold could be left holding an empty bag. If this happens then the media will likely paint physical gold with the same risk laden brush as paper gold. Many people would be left with the impression that all gold is risky. This has happened many times before in many different ways. For example, capitalism has been under fire during this crash even though we have not been practicing true capitalism for many years. Instead we have had crony capitalism where the elite get to print money from thin air to invest while the rest of us have to work for it. Also, if we lose, we lose whereas if they lose we still lose. This is not capitalism; this is not a meritocracy. Real capitalism can only occur when nobody has special economic privilege which is to say, when there is no “rubber band” money supply enabled by fractional reserve banking.
Keep an eye on the price of silver. It has historically served as a good canary in the deflation/inflation coal mine. If silver is in a downward trend then the economy is most likely in deflation overall. I like to use triggers and so do many other people. The current market thinking is that as long as silver cannot create new highs (i.e. more than $20.50 spot), there is no way that the deflation is over and that the ensuing massive inflation has begun. If silver begins to break out to new highs then worries about hyperinflation are on the rise and holding dollars becomes a risky position. People have to really internalize the fact that paper money and electronic money have zero intrinsic value. It will only trade for what some greater fool will give you for it. At some point in the life of every fiat currency the people decide it is worth very little or in fact nothing at all. That’s what hyperinflation really is – an awakening by the people to the fact that something they have trusted for so many years is in fact a vaporous lie which can evaporate literally over a matter of weeks under the correct circumstances. Once the confidence in the trust Ponzi is gone, so is the value of shares in the Ponzi.
