Saturday, February 21, 2009
Hyperinflation And Phantom Finance
The world is going mad. The gold price briefly touches $1000 yesterday, and yet demand for the metal is collapsing, other, that is, than in Gold Exchange Traded Funds, which claim to hold tonnes of the metal in warehouses of unspecified location. They refuse to permit anyone, even their own auditors, to see any real metal. (See 'Is GLD ETF really worth its metal? HERE).
The reason, however, the ETFs and their numerous media supporters claim that people should be buying their phantom gold in the first place is the coming of the dreaded 'hyperinflation'.
So let's have a quick look around see where this hyperinflation is located, seeing as we cannot find any gold anywhere.
Shares are tanking. Commodities are tanking. Wages are tanking. Prices in shops are tumbling. Yes. That sounds like hyperinflation is a real problem right now. These geniuses are clearly onto something.
But please, anyone interested in maintaining just a modicum of rationality, just sit back in your chair and start again. It is not hyperinflation which is the problem we are faced with. It is the exact opposite - deflation. Look at the 40 year chart of Treasury Bond Yields and see how longterm these trends are. There is not going to be a sudden new hyperinflationary beast stalking the earth - at least not for quite a while, and then only if governments go completely mad.
The only modern day country that faced hyperinflation was Germany in the 1920s and that was caused in part by the terms on which they surrendered in WW1, where huge Reparations were demanded by the 'Allies' to force Germany to pay for the war they had caused. OK things can happen and history can repeat itself. But let's at least make a clear-headed statement of 'where are we now?' first before we set out objectives of where we need to go next.
The answer is we are locked in a deflationary environment. Why don't we deal with that first before engaging with an imaginary hyperinflationary beast, who hasn't even made a guest appearance on the planet for three generations...except in Zimbabwe. Now if I was in Zimbabwe, yes I would buy some gold. But really I would actually be buying US dollars as they are a lot more easily converted, and are not subject to the volatility that gold is.
Just look at the bargains in the stock market shortly to be on offer, once shares are down another 20 or 30%. You don't follow the herd to make money. You buy when everyone else is selling, and you sell when everyone is buying.
Gold will tank next once the hyperinflationists calm down and face deflationary reality. They should sell their gold now, and get ready to buy shares if money-making is their goal. But they seem more fixated by their belief that hyperinflation will come and eat them all up, like the Big Bad Wolf in Little Red Riding Hood.
Gold ETFs offer phantom gold to deal with the phantom threat of hyperinflation. There seems to be a whole new subject for study at college - Phantom Finance And Its Inexplicable Appeal.
UPDATE 22nd February 2009 - Deflation - How It Can Be Stopped.