With Stock Markets, Commodities(precious metals, oil), falling prices for manufacturers and the ongoing currency wars.... ARE WE IN THE MIDDLE OF A DEFLATIONARY SPIRAL ? I'm certain that we are.... I'm just not sure if we are at the beginning(entering) or at the middle..... any speculations folks ?
Don't care about explanations and whatnot, just busy with the golden/silver opportunity presented to us!
Well, I'm just thinking.... if there is a strong deflationary moment, there is no point to buy right now..... as the prices will drop much further IMHO.... just a thought and looking the dealers around the country dropping their prices by the minute....
I tried raising a similar argument several months ago. For older discussion, see: http://forums.silverstackers.com/to...omic-malaise-stagnant-gold-silver-prices.html Worth thinking about again in light of what we know now.
How gold might react in a deflation under today's fiat money system is a more complicated scenario. Even deflation under a fiat money system, the general price level would be falling by definition. Economists who make the deflationary argument within the context of a fiat money economy usually use the analogy of the central bank "pushing on a string." It wants to inflate, but no matter how hard it tries the public refuses to borrow and spend. (If this all sounds familiar, it should. This is precisely the situation in which the Federal Reserve finds itself today.) In the end, so goes the deflationist argument, the central bank fails in its efforts and the economy rolls over from recession to a full-blown deflationary depression. How the government treats gold under a deflationary scenario will play heavily into its performance: - If gold is subjected to price controls and restricted ownership, as it was in the 1930s deflation, it would likely perform as it did then, i.e., its purchasing power would increase as the price level fell. Under such circumstances, the ownership of "rare and unusual" gold coins might once again come into play. - If ownership is not restricted, it would turn out to be the best of all possible worlds for gold owners. Its purchasing power would increase as the price level fell, and the price itself could rise as a result of increased demand from investors hedging systemic risks and financial market instability. Note: That, by the way, is the primary reason governments tend to restrict gold ownership when confronted with widespread bank runs and failing financial markets. Governments seize gold not because they need the money; they seize it to cut off the escape route and force capital flows back into banks and financial markets. As an aside, that is precisely the reason why governments have an interest in controlling the price of gold. Former Fed chairman Paul Volcker, it has been copiously reported, once said, "Gold is my enemy. I'm always watching what it is doing." Though there is no direct evidence I know of that the Fed or Treasury Department intervened directly in the gold market during Mr. Volcker's tenure, his statement does reflect the acute interest in gold on the part of monetary policy-makers. Alan Greenspan voiced a similar interest in gold throughout his Fed chairmanship and still does today, though unlike Volcker he has always defended gold and expressed an appreciation for its use as a form of money or final payment or reconciliation. Gold, in the end, is not just competition for the dollar; it is competition for bank deposits, stocks and bonds most particularly during times of economic stress and that is the source of enduring interest among policy-makers. http://www.usagold.com/cpmforum/2014/01/16/gold-as-a-deflation-hedge/
Basically for gold to rally during deflation confidence has to be lost in government's ability to control the deflation and therefore the government's currency. Loss of confidence in governments would be translated into a sovereign bond market crash meaning the costs of financing government debt becomes substantially more expensive. We would see more and more QE before governments would allow this to happen as they themselves would be left holding the bag. If it came down to it, governments would sacrifice the stock market to save the bond market.
It comes down to the individual's comfort level in regards to risk. I buy and store bullion through Bullion Star in Singapore although I don't have much over there and I'm not buying gold/silver at all at the moment. If I get a decent amount accumulated over there I intend on using third party storage (Certis Cisco or the Freeport) in case something happened to Bullion Star
Three Reasons Gold Rises During Deflation First people lose faith in fiat currencies since those currencies are backed by nothing but government promises. And deflation the bad deflation that central bankers fear the most is proof that the government and its monetary agents have done a horrific job of managing an economy. Faith is lost. That's precisely what the Great Depression showed. The dollar was backed by gold until America's socialist-minded president of the day, Franklin Roosevelt, stepped in with a currency-devaluation scheme that effectively turned the hard dollar into a fiat dollar which is why Homestake Mining raced sharply higher between 1932 and 1934. Second since people have no faith in fiat currency, they demand a proven store of value. Gold haters are simply wrong when they say gold has no intrinsic value beyond its use in baubles and a few technology processes. Gold has value because societies going back more than 2,000 years have ascribed value to it rightly or wrongly. Until the mentality of man changes, gold will always have intrinsic value as a replacement currency. And, third people are smart. They know central bankers and politicians hate deflation because of its impacts particularly its impacts on debt. Deflation is a disaster for those who are indebted because the dollars needed to repay those debts are deflating away, making the debt ever-harder to pay off. Think about the country with the greatest debts, and the size of those debts and then imagine the challenge the political leaders in Country X will face in a deflationary world. People know that if deflation really does emerge, monetary officials in the U.S., Europe or elsewhere will do everything and anything to kill it. FDR's team, for instance, confiscated gold and devalued the dollar. In doing so they gave government the ability to battle deflation by spending drunkenly on socialist programs through the use of a new fiat currency that could be easily manipulated through the creation of credit and new currency units. Gold-based currencies cannot be expanded without the cost of mining and processing additional gold. For those three reasons, the true value of gold soared during the greatest deflationary crisis in America which is why Homestake Mining's shares exploded higher. It was the markets telling the world that gold was increasingly valuable, even as deflation raged. If deflation really does arise, you will absolutely want gold in your portfolio. http://thesovereigninvestor.com/gold/history-what-happens-to-gold-during-deflation/
Interestingly, The Fed Reserve have a discussion paper back in 2004 regarding China Exporting Deflation.... Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 791 January 2004 Is China "Exporting Deflation"? Steven B. Kamin, Mario Marazzi, and John W. Schindler http://www.federalreserve.gov/Pubs/ifdp/2004/791/ifdp791.pdf China might have a problem with deflation but, then again Japan also has.... The real problem I see is the cheap/printing money... it's not healthy for the world economy and it's creating a total unbalance in all asset classes....
I don't really see deflation as a problem for stackers, as long as the deflationary increase in purchasing power is reflected across the economy. I don't mind getting 25% less for my PMs if everything else costs 25% less. Nothings really changed except the numbers involved but if the gold to picnic bar ratio hasn't changed or the silver to liter of petrol ratio is basically moving sideways there's no issue. Plus I just paid off my debt and I have a little (very little) bit in savings for a change so deflation suits me just fine.
Thanks for posting that article, I don't know who the Sovereign investor is but I can't say I agree with much of that article. People don't lose faith in fiat currencies, people don't know any different and the idea of backed and unbacked currencies means nothing to them. To the illuminated bankers, politicians and gold bugs it might mean a bit, but they are in the minority compared to the millions of people who just see money as money. A few European countries places suffered at the end of World War 2, The old Soviet Block countries in the early 90s, South America since the 80s, some African countries more recently but this is all something that happened in the past or in another country, it has been a while since anyone in the UK, USA or Australia has had any first hand experience of such things. The second point just assumes we agree with the first point, assumes that gold would be the 'go-to' choice for a store of value, rather than real estate which is doing quite nicely at the moment. It goes on to say "Until the mentality of man changes, gold will always have intrinsic value as a replacement currency." I would say that the mentality of man has changed, gold is for jewellery now, very few people will be able to remember a time when gold was actually used as money and people who remember silver as being money can't understand why you would make coins out of such an expensive metal when there are cheaper metals out there. The third point is debatable, they are smart when it comes to things which are important to them but most people seem to be unaware of inflation, or at least, unaware that it is a planned process rather than something that just happens over time as a natural process of 'things costing more'. Trying to explain stagflation and deflation would go in one ear and out the other and I think most people would welcome the thought of deflation if they thought it meant cheaper goods.
Asia forex hit by oil slide, deflation worries SINGAPORE, DEC 1: Emerging Asian currencies from Malaysia's ringgit to South Korea's won hit new lows on Monday, as data highlighted the economic toll wrought by plunging oil prices, sending the dollar broadly higher. The ringgit underperformed regional peers, falling to around 5-year lows as investors worried that US crude's slide to a five-year low will hurt growth in Malaysia, a net oil exporter and major palm oil producer. South Korea's won touched its weakest in more than 15 months after data showed an unexpected slide in November exports and as the yen fell to its lowest in more than seven years against the dollar. Deflation woes The sell-offs in the region's currencies come as sliding oil prices continue to stir deflation fears in the euro zone and Japan. "Falling oil price reflects partly growth concerns, which are Asian FX negative. The monetary stance is expected to shift to easing bias in the medium-term,'' said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore. China's manufacturing data Earlier on Monday, China reported slower growth in its manufacturing sector in November, suggesting the world's second-largest economy is still losing momentum. China's yuan eased to two-month lows after the central bank set another weaker midpoint. The Indonesian rupiah did not escape the grim mood, skidding to an 11-month low as October exports fell more than expected. Commonwealth Bank's Ji expects markets to increase the odds of a rate cut in Malaysia amid the deterioration in the trade sector, adding that in general the dollar is likely to remain firm this week. Traders will also be focused on central bank meetings of the euro zone, England and Australia this week. Ringitt plunges The ringgit lost as much as 1.6 per cent to 3.4375 per dollar, its weakest since February 2010. The Malaysian currency came under pressure from dollar demand linked to daily-fixing, while the central bank was suspected of intervening to limit the unit's depreciation, traders said. Won drops The won fell as much as 1.1 per cent to 1,120 per dollar, its weakest since August 23, 2013, after data showed exports in November unexpectedly tumbled their most in more than 1-1/2 years, increasing pressure for further rate cuts. Rupiah falls The rupiah slid 0.6 per cent to 12,270 per dollar, its weakest since January 7. The official Jakarta Interbank Spot Dollar Rate (JISDOR), which the central bank had launched last year in an effort to manage exchange rate fluctuations, was fixed at 12,264 rupiah per dollar, weaker than Wednesday's 12,196. Indonesia's exports in October fell a worse-than-expected 2.21 per cent from a year earlier, while a survey showed manufacturing activity contracted in November to its weakest level since early 2011. (This article was published on December 1, 2014) http://www.thehindubusinessline.com...il-slide-deflation-worries/article6651256.ece
http://www.ft.com/intl/cms/s/0/7a0e882e-700b-11e4-bc6a-00144feabdc0.html#axzz3KbN3nMl7 China: Fear of a deflationary spiral Falling prices for manufacturers plagued by overcapacity present a problem for Beijing's policy makers The 600,000-square-metre China Commodity City in Yiwu city, often referred to as "Walmart on steroids", is one of the world's largest wholesale markets. Traders from the Middle East, Russia and Africa come to the market in eastern Zhejiang province to browse a staggering array of products from umbrellas to buttons to refrigerator magnets commemorating every city in the world many made in one of the small factories dotted around the city's fringe. But as the holiday season approaches, Guo Wei, factory manager at China Zhongsheng Crafts Co, which makes plastic Christmas trees for export to the US, the UK, Australia and Japan, is struggling to cope. For some products, the company is even selling below cost. "Sales revenue is holding up OK, but when it comes to prices, customers want them lower and lower. They all say the economy isn't good," said Ms Guo. "Some of our own products aren't profitable any more but we still make them to keep our customers happy." Cheaper Christmas trees may sound like good news for western consumers. But falling prices in China pose a rising threat to economies across the globe, many of which are grappling with their own issues of weak demand and troublingly low inflation. After a decade in which rapid growth and investment gobbled up China's enormous output, many of its factories like those in Yiwu are finding it difficult to shift stock. Demand at home and abroad has been stalling, leaving many industries with chronic overcapacity, especially in basic commodities like steel, glass and cement. For many, the only answer is to keep cutting prices. The result is reflected in China's official statistics, which show that so-called producer prices have been in outright deflation for nearly three years. Perhaps even more worrying, consumer prices have dropped to a near five-year low of 1.6 per cent on an annual basis in October. "You think there's a problem in the eurozone? There's a far bigger problem in China," says Albert Edwards, strategist at Socit Gnrale. China is the world's top exporting nation, and the main trading partner with dozens of countries. As its manufacturers drop prices to increase sales, the impact is being felt across the world, from the factory floor to the shop shelf. With policy makers in many economies Europe and Japan especially worried about falling prices, China's own ability to boost inflation is becoming a key part of the puzzle. As George Magnus, an economic adviser to UBS, puts it: "The rest of us need Chinese deflationary pressures like a hole in the head." Optimists say China is unlikely to tip into the kind of stubborn deflationary spiral that has dogged neighbouring Japan for two decades and is dominating the policy debate in Europe. Growth, for now at least, remains above 7 per cent a year, making it an important engine of global demand. But in a possible sign of rising concerns about disinflation, the People's Bank of China cut interest rates in November for the first time since 2012. "It's a clear indication of how heavy deflationary pressure in China can be these days," said Franois Perrin, head of China equities at BNP Paribas Investment Partners. For over a decade, China has faced accusations of exporting deflation. In 2002, Haruhiko Kuroda then a Japanese finance ministry official, now head of the Bank of Japan warned in the Financial Times that China's entry into the World Trade Organisation would add a "powerful deflationary force" to the global economy. Just over a year later, the US Federal Reserve published a discussion paper entitled: "Is China exporting deflation?", but it concluded that the Chinese economy was "too small" to have an impact. A decade on, China's place in the global economy has been transformed, both as a supplier of goods and a source of demand for raw materials. The Chinese slowdown has been a key factor in falling commodity prices, such as oil, which sank to a four-year low last week. The drop in global energy costs is feeding through to weaker inflation everywhere, but many see China's current bout of disinflation as a symptom of deeper problems that are unique to the world's second-largest economy: chronic overcapacity, insufficient demand and faltering growth. All are side effects of a top-down system where cosseted state enterprises are reluctant to retrench and local governments are engorged with easy credit. The country has a long history of excessive development across industries, from solar panels and shipbuilding to steel and chemicals. Many companies in these sectors are now on life support and are increasingly reliant for funding on China's vast shadow banking system, where "non-bank institutions" sell wealth management products that offer high returns on investments regarded rightly or wrongly as underwritten by the state. Even the downturn in the housing market can be attributed to the burden of oversupply in many cities. Last week, government researchers put a figure on wasteful spending. By their calculations, $6.8tn has been squandered on "ineffective investment" such as needless steel mills, ghost cities and empty stadiums since the start of the 2009 stimulus launched to buffer China from the global financial crisis. Overcapacity is largely the result of pressures on local governments. The performance of local officials has long been evaluated based on gross domestic product, creating an incentive to maintain production even at unprofitable factories. Excess capacity has unfortunate consequences: falling prices undermine corporate profitability and lead to stress in the banking system. Local officials lean on banks to relax lending standards for companies that would otherwise be forced to close down. Unprofitable manufacturers pile on ever more debt but avoid bankruptcy and maintain production, adding more downward pressure on prices. The central government has pledged to stop measuring officials' performance mainly based on GDP, but this change will take years to trickle down to lower levels of government. Deflation has also fuelled the build-up of risk in the financial system. Cut off from bank finance, companies in oversupplied industries, especially privately owned ones, pay exorbitant interest rates in the shadow banking system. Falling prices at the factory gate make the burden of that growing debt even heavier, raising the risk of defaults. Overcapacity is not just a local problem: sinking prices for Chinese-made goods affect costs globally. Before the financial crisis, that helped drive a consumer boom in the west. But now excess supply risks worsening the problem of falling prices in developed economies. Eswar Prasad, economics professor at Cornell University, says: "Disinflation and weak demand growth in China could have adverse spillover effects on other countries grappling with even more severe versions of these two problems." Deflation inflicts a dual blow on an economy. It increases the burden of debt in real terms, something that China, which Standard Chartered estimates has a debt-to-GDP ratio above 250 per cent, can ill afford. Falling prices can also hold back consumption, as people delay purchases in expectation of even cheaper prices. But as China tries to shift its economy from credit-fuelled investment towards consumer-driven growth, it needs its citizens to go shopping. In the scenario of higher spending, China's policy makers could do very little, at least until the prospect of outright deflation becomes a more serious risk. "Cheaper commodities benefit consuming countries which drive global demand," says Fred Neumann, chief Asia economist at HSBC. If prices continue to tick down, Beijing has several options for generating demand. But as central bankers in Japan and Europe have found, stirring inflation with monetary policy is no mean feat when dealing with years of excess credit growth. Many analysts expect further rate cuts and more targeted easing measures for some sectors. This could support consumer spending and reduce the debt burden on companies. But there are questions about the impact of rate cuts on the broader economy. Lower borrowing costs will largely benefit hulking state-backed companies, helping them to keep going even if they are not economically viable. Rate cuts could also signal the status quo will be preserved, which "might give the market an impression that the new government once again uses credit easing to stimulate growth", said Lu Ting, chief China economist at Bank of America Merrill Lynch. Under President Xi Jinping and Premier Li Keqiang, China has laid out a path towards comprehensive reform designed to introduce real market forces. But there has been little to show for it. "I think the majority in policy circles still talk about reform in a positive way," says Zhang Zhiwei, economist at Deutsche Bank. "The question is about timing and how to do it." Until then, China's economic model remains reliant on the trusted drivers of growth credit-fuelled investment and exports. However, both are under increasing strain. Credit growth has been explosive in recent years since the financial crisis, while weak global growth means that the export engine is stalling, and driving down prices. The worry is that China decides to take the nuclear option to fan inflation at home: currency devaluation. A sharp drop in the value of the renminbi could boost exports, and help use up excess capacity; it would also offset the drag of weaker commodity prices. But raising import prices would be bad news for Chinese consumers, as would higher input costs for manufacturers. Analysts say the chances of a devaluation are still slim, but growing. "I don't think this is likely, but the weaker Chinese data gets, the greater the pressure on policy makers to go for the easy option of devaluation," says Mr Neumann. "Should China opt to depreciate its exchange rate, this would be a game changer." Such a move could prove disastrous for efforts elsewhere, notably Europe and Japan, to fight deflation. China is the world's top exporter to the EU, meaning that a significant drop in the price of its goods would put fresh downward pressure on already very low inflation trends in the eurozone. But the aggressive expansion of the BoJ's quantitative easing programme has raised the stakes. The yen has tumbled to a record low against the renminbi, while South Korea has put the market on notice that it is watching the Japanese currency closely. If the BoJ sparks a regional currency war, China may not be able to remain neutral. "If you're trying to crush a credit bubble, which the Chinese are, the last thing you need is a rapid appreciation in the exchange rate," says SocGen's Mr Edwards. "Economically, China doesn't have a lot of choice. It's just an inevitability, and Japan is the straw that broke the camel's back." Corporate debt Historic default fails to clean up financial sector In March, solar-panel maker Chaori Solar failed to meet an interest payment on its bonds, marking China's first default of the modern era. Investors expected a wave of corporate bankruptcies and defaults to follow, which would have damaged confidence but would have cleared away some of the excess capacity that has been pushing prices down. Raising the potential for corporate failures was expected to lead to more rational pricing of risk, as investors began to realise not everything was underwritten by the state. Reality has proved rather different. Fears that injecting too much risk into the system too quickly would close the window for refinancing companies have overridden expectations. Regional authorities were also afraid of playing host to corporate failures. Instead, local government officials prevented companies from going bust by strong-arming banks into making new loans. Defaults failed to emerge, while non-performing loan rates at large banks although rising have remained extremely low. Chaori bondholders were ultimately bailed out by a state-owned bad bank in October. Huarong, another of China's bad banks, also rescued those invested in "China Credit Equals Gold #1", a trust product that had teetered on the brink of default in January. In both cases, the bailout was largely kept quiet, leading to assumptions of state-directed assistance. There have been attempts at shaking up the status quo and introducing more market forces into the economy. Many large state-owned enterprises have this year announced restructuring or asset spin-offs. Sinopec recently sold a $17.4bn stake in its gas station business, Citic Group is injecting $37bn of assets into its Hong Kong-listed arm, while China's three mobile operators are exploring a stake sale of their pooled towers business. But these measures remain piecemeal, and are in many ways simply experiments at the margins of the economy. http://www.ft.com/intl/cms/s/0/7a0e882e-700b-11e4-bc6a-00144feabdc0.html#axzz3KbN3nMl7
Eventually all this lower inflation - deflation from Asia and Europe will be exported to the US as the higher USD will make it uncompetitive. It will take a little time but CPI is trending type of data. It will go from where it is now at 1.7% down below 1.5%. They'll be talk from the Fed about pushing back interest rate rises to late next year. CPI will continue to gradually make it way towards 1% at which point it will become obvious the Fed won't be able to raise rates without killing the economy at which point another form of QE program will take place.
