Aug 9 2010 4:03PM
Why Gold and Silver Seem Stuck
I have contended that the Obama Administration has printed so much money that it will cause serious price inflation. So why is gold stalled around $1,200 and silver around $17 and we are seeing actual price deflation?
Let me restate some economic principles:
Inflation is first and foremost a monetary phenomenon. Monetary inflation is the real threat caused by creating money out of nothing. Price inflation is not real “inflation” but merely the
natural consequence of monetary inflation and tends to follow with a time lag.
Gold and silver are performing their usual predictive function in anticipation of future price inflation. They have risen steadily for several years.
From a price-inflation perspective, we are in a deflationary period. From a monetary inflation point of view, the government is still printing money and monetary inflation will continue. It will not be reflected in price inflation until the money gets into circulation.
The Velocity of Money
The banks where the money has been deposited will have to start lending the money to get it into circulation. The government produced the money and gave it to the banks, and the banks must loan it into circulation.
Because of all the uncertainties created by the Obama Administration about the future of taxes and the economy, banks are afraid to loan money for fear of losing it. Businessmen are logically afraid to borrow because they don’t know what the future looks like, so they won’t invest and expand their businesses, keeping the economy in the doldrums.
Until the banks realize they can’t make much money if they don’t loan the money they are sitting on and just deposit it in interest-bearing accounts yielding under two percent at the Federal Reserve, the money won’t get into circulation and cause price inflation.
Always distinguish monetary inflation from price inflation. Monetary inflation is caused by creating more currency; price inflation is caused by the velocity of money or currency getting into circulation.
Despite the fact that we are in a price-deflationary period, gold and silver are holding up under forces that theoretically should be bearish for the metals, but it isn’t bearish for the metals because the markets are looking ahead to the inevitable future price inflation When price inflation shows up, they will take off.
Also, Socialism always causes inflation. The Soviet Union tried to control price inflation with price controls, which inevitably created horrendous shortages with people standing in line if a rumor spread that a store had something to sell. Even if they didn’t know what it was and didn’t want it, they knew they could barter it or sell it for rubles which they could spend to support their families.
We will see the same thing. When price inflation breaks out, government will eventually try to control price increases, which will create inevitable shortages. I don’t know when it will happen, as the timing is beyond my pay grade. It is inevitable. We simply need to wait it out and use the current pause in the markets to load up on gold and silver to protect our assets from the coming price inflation.
The metals serve two basic functions. One is insurance. When you own coins and bullion, you are insuring against the potential loss of the purchasing power of the dollar. Money is supposed to be a medium of exchange and a store of value. The dollar is still an important medium of exchange, but many years ago ceased to be a store of value.
You need to own some actual bullion or bullion-type coins for insurance. Not for profit, but for insurance. It will be profitable, but that’s not your primary objective. If you want to make big money with gold and silver, the best way is gold and silver in the ground.
That’s why I recommend mining stocks after you have insurance. The fundamentals that apply to any corporation apply to mining stocks. I have listed many of them in my Maverick Ala Carte Investment Menu.
The mining stocks are the place to make money. It will not be the place ultimately for insurance protection.
The day will probably come when liquidity in the stock market is a real problem. When I see that coming, I will recommend you liquidate your mining stocks and transfer your assets into gold and silver coins and bullion.
By Howard Ruff
The Ruff Times
Howard J. Ruff, the legendary author and financial advisor, has re-edited and re-issued his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times financial newsletter. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio.