Should people insist on saving and the government insist on resisting their decision with inflation and quantitative easing, the most likely outcome will not be sudden enlightenment and a resurgence of unsustainable consumption, it will be a shift to alternate forms of savings: gold, food, fuel, etc. In fact, the more money is printed in a failed attempt to revive demand the more money will ultimately pile into alternate forms of savings, causing prices to rise even faster. If we intervene to “put out the fire” (and we are) the more ominous the risk of deflation, the more money is printed, the more gold will ultimately advance.

But that assumes people lose faith in dollars, even if the dollar doesn’t collapse and currency markets remain strong, gold can still advance. Other than a few years, commodities advanced throughout the 1930′s deflationary depression because supply dropped faster than demand.

But that assumes supply will drop, even if commodities don’t increase in price, gold can still advance. It’s not just a commodity, it’s an instrument of savings. Gold is money, just like dollars. If dollars advance in a deflationary bust, so should gold.

And remember, those are the deflation scenarios. There are just as many inflation scenarios, all of which also result in gold going up. And please take note of the irrelevance of “capacity” to this debate. Prices can rise despite spare capacity because the existence of capacity does not prove the existence of relevant capacity, factory A can not produce the same goods as factory B because they’re both called a factory. And the longer a factory sits idle, the more it costs to bring it back online.

Under what scenario would gold collapse? Legitimate economic growth. An economy with abundant savings, faith in its currency and abundant productivity improvements from successful companies doing useful things has a diminished need for gold. Since we’re reduced to identifying scenarios and guessing probabilities, I think everyone can agree that is the least likely outcome.

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Last year most people were totally clueless. Today, they find my actions more curious than weird. With interest rates at an all time low, currency valuations in doubt, stocks markets plunging all over the world, real estate markets crashing, and many warning of a pending bubble in government bonds, there is nowhere to hide but precious metals. It’s unlikely more banks will fail, but individual corporations may start to drop like dominoes, possibly even institutions managing the popular exchange traded funds. Gold has zero counter-party risk, it pays no dividend but it can’t go bankrupt. The value may fluctuate but it will never go to nothing. Gold has outlived every stock, every bond, every country, every currency.

The more sophisticated banker types aren’t surprised to hear my argument, even though nobody has done anything about it, I get the distinct impression they’ve heard it all before and buying some physical metal has crossed their mind. Regular people understand the rationale but still regard gold for savings as a foreign idea, but a few ask to see some bullion. Overall, I am convinced the gold market has barely been tapped by ordinary folks. We are so far from a top it would be funny if it weren’t so scary.

I believe the primary obstacle to a further adoption of gold for savings among the general public is a cultural barrier, people have been trained to believe gold is old fashioned or a scam run by bankers. The real scam is dollars, they’re just worthless paper. At least silver has many industrial uses and gold is pretty! I always tell people to buy a few coins or small gold bars, nothing too elaborate, because I am convinced once they have it in their possession and see it in their hands it will become clear. Humans are attracted to gold like bugs are attracted to neon lights. There is a reason gold has survived as money for thousands of years — it works.

Bernanke is a student of the great depression and is apparently a big fan of FDR’s decision to devalue the dollar from $20.67 per ounce to $35 per ounce, a 69% increase in the price of gold. He credits this move with helping to lift the economy out of its hopeless slump. Today with gold at $830 per ounce a similar move would take it to $1405. Of  course there has been a public policy of suppressing the price of gold for decades so nobody really knows the true market value. It’s not unlikely the Fed would need to devalue the dollar to $6000 per ounce or more to achieve the same effect.

Regardless of any deliberate policy, gold is still the best hedge against a risk of either inflation or deflation, but especially hyper-inflation. If the Fed doesn’t guide a managed devaluation of the dollar, their hand may be forced by more chaotic events. Psychology doesn’t move in small steps, people can perceive dollars to be a good store of value on Monday then not on Tuesday. The longer they wait, the more steep the declines.

Personally I am still accumulating physical gold and silver, just in case. I prefer to only use GLD and equities for trades.

I have heard interesting arguments on both sides from people I respect, but over the long term does anybody really believe a dollar spent in America will yield the same growth prospects as a dollar spent in Asia? How much higher can the standard of living in the developed world rise relative to our financially challenged friends abroad? Just keep this in mind — one day dollars will be plentiful again, where will they be spent?

Nixon ends the Bretton Woods agreement.

The solution.

I hold a similar view with respect to commodities. Despite my inflation worries I took advantage of the froth this summer to raise cash from my agriculture and coal holdings, but my decision was motivated by gains, not losses. Since then, the market has formed a short term top and began a dramatic decline. You might even say it Tanked, with a capital T.

So how do you know when to get back in? When the weak hands capitulate. What we are witnessing today is not profit taking, it’s liquidation. To find the best time to enter a market, you need to wait until the fundamentals are in your favor but the headlines are not. Gold peaked when it hit the front page of my local newspaper and some of my never-invested-before friends started asking about gold and oil. So I say, bring on the doom and gloom. Kudlow is your best friend. I almost want to avoid posting new articles on this blog for fear I may give people hope. I want so many people to lose so much money that everybody is convinced the commodity “bubble” is toast, then I will quietly snap everything up.

Let’s have a few more funds go bust, I have plenty of cash and plans to retire early.

In December 2000, the average length of US public debt held by private investors was 70 months. As at March 2008, the average length had shortened to 53 months (a decline of 24%). 71% of this debt is due in less than 5 years; 39% is due in less than 1 year.

http://www.eurointelligence.com/article.581+M563d02ed27c.0.html

While I am distinctly aware of the bankers ability to manipulate gold downwards, I will never be scared out of my gold position because I can see their hand, and it’s all red… ink. What will they do when trillions worth of treasuries mature in the next few months, do you honestly believe foreign central banks will re-invest all that money in new long term treasuries at these rates?

Let’s examine their options:

1. They could buy new short term bonds. If foreign governments agree to buy short term bonds, it’s almost guaranteed the Fed will not be increasing interest rates for a few years, in fact they may lower them a bit more. Gold higher.
2. They could diversify into other currencies. If even part of the return is invested in other currencies, even countries that don’t hold much US debt will likely follow to prevent the value of their holdings from dwindling to nothing. The US dollar will get hammered. Gold higher.
3. They could diversify into other commodities. If even part of the return is invested in commodities, gold or not, it will spark a new monster rally. The US dollar will get hammered. Gold higher.
4. They could use the money to stimulate their own faltering economies. Reverse demand destruction, more inflation. Gold higher.

In all cases, the trends that have been prevalent for the past few years either increase a little or increase a lot, but there is no case for them to reverse. Even if, by some miracle, all those dollars are re-invested in long bonds at these rates, the debt is still rising and the service payments along with them.

And we haven’t even seen the worst of this banking crisis — we haven’t seen the bailouts of Freddie and Fannie, we haven’t seen the bailout of the FDIC, we haven’t seen the new stimulus packages, we haven’t seen the new war bills, increased entitlement payments for retiring baby-boomers, etc. The only way the US federal government can cover its obligations is to get Mr. Bernanke at the Fed to create new dollars, further enslaving the government and further increasing the money supply.

Gold higher.

That doesn’t mean we won’t see new lows and it doesn’t mean we will make new highs this year, the technical damage has been savage, but if you have the capacity to wait out the turbulence, you will be rewarded.

Everybody knows that price controls cause shortages, and shortages ultimately cause prices to rise even faster, but that doesn’t mean all shortages are caused by price controls. You can have temporary surges in demand, temporary interruptions in production, or perhaps even temporary obstructions of delivery. But what if none of these problems existed, and we still have shortages that extend for several quarters?

There are now countless stories of silver shortages dating back to last year and rumors of rampant gold shortages everywhere from Africa to India. Except for some unknown reason despite these shortages gold prices are declining instead of rising…There seems to be a total separation between physical metal market and the paper markets, exactly as occurred in agriculture before prices started correcting on the downside, are we about to experience a similar correction on the upside in gold and silver?

If this were any other commodity I would probably say it’s just a blip in the market and everything will correct itself over time, as it did with wheat and other agricultural commodities, but when we’re dealing with real money I have to ask the question nobody wants to answer… and that brings me back to price controls.

For several weeks now almost every major downward movement in the price of gold has occurred when both London and NYMEX were open together. Are we perhaps witnessing the first shot across the bow by central bankers in Europe and America intervening to defend the dollar? If that is the case, this downward pressure may last longer than a free-market system could sustain, but ultimately when the controls break, and they will break, gold will rise so violently you will cry if you miss it.

Understand the risks and be cautious of a difficult road ahead, but keep your eyes on the ball.