Is Now the Time to Acquire Gold – Or Run Away From It?

Is this the time to acquire gold? Or is this the time to run away from it? Either answer could be correct, depending upon what course government chooses. Government is at a decision point, one that will determine how our economic malaise next turns. [Let’s review their choices.] Words: 922

 So says ”Monty Pelerin” (a pseudonym derived from The Monty Pelerin Society) in edited excerpts from his original article* as posted at www.economicnoise.com .

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This, and the preceding paragraph, must be included in any article re-posting to avoid copyright infringement.

Pelerin goes on to say, in part:

Governments have two choices:

1. Fight deflation by increasing the money supply by whatever amount necessary.
2. Stop using monetary policy to offset the inevitable.

• aims to hold prices up in the face of a massive contraction in liquidity as the debt structure of the country shrinks, primarily via defaults. Even if this course is chosen, it is not certain that the rate of liquidity collapse will be offset by the creation of new liquidity. Government is clumsy and inept. Any attempt to counteract deflation risks inflation, perhaps hyperinflation. It is a choice fraught with potential unintended consequences.

The second choice:

• accepts whatever level of deflation results as an inevitable outcome of past excesses. It abandons an expansionary monetary policy and faces the reality that a correction is both inevitable and necessary in order to return the economy to health. It will produce a Depression which purges the economy of the imbalances and misallocations which developed as a result of decades of government interventions.

• Without the continued stimulus from government spending and Fed money-creation, the economy shrinks and
• debts are defaulted upon.

A rare phenomenon has just occurred and may activate Fed action. The Fed and Mr. Bernanke are deathly afraid of deflation. Yet that is exactly what some data are suggesting. Zerohedge reports on a key indicator and the possible Fed reaction:

For the first time on record (based on Bloomberg’s data) 5-year / 5-year forward inflation expectations turned negative today. This kind of deflationary impulse has occurred twice in recent years and each time has been accompanied by dramatic Federal Reserve easing. The anticipation of the move by the Fed has caused Gold each time to surge higher on yet more expectations of the fiat-fiasco unwinding. Given the 5Y5Y inflation print currently, we would expect action from the Fed and one could argue that this would cause the price of Gold to rise to $2200 per ounce as the deleveraging continues.

The red arrows show the deflationary impulse (5Y5Y inflation is inverted) and the orange curve arrow shows the reaction function post Fed reaction to the blue arrow levels of the deflationary impulse.

Chart: Bloomberg

A deflationary trend makes it harder to pay down debt or create jobs. Ultimately it produces a Depressionary scenario with massive unemployment and debt defaults. From an economists standpoint, that is inevitable at some point because the level of debt cannot be serviced. From a political standpoint, it is death. No political figure wants to be known as the new Herbert Hoover.

As mentioned many times before, decisions regarding the economy, or anything else for that matter, are not made in regard to what is best for the country. They are made for the benefit of the political class.

Conclusion

The last thing the political class wants is a massive economic downturn. Hence, my guess is that the Fed will bend to the wishes of its political masters and “print money.” As a side note, even if deflationary signals had not been seen, I would still expect government to print money simply because without it, government is unable to meet its obligations.

*http://www.economicnoise.com/2012/06/06/another-bad-economic-sign-another/

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article

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