Deflation will be in terms of gold, like in 1929

We have finally gotten to the point where most investors and the media understand the severity of the credit crisis and are expecting deflation. It is a good start, but unfortunately, it still isn't quite right.

Deflation will be in terms of gold, like in 1929

As deleveraging occurs and debt is destroyed, prices of commodities and other assets will fall in terms of real money, which is gold and other precious metals. The price of oil, for example, will continue to fall in terms of gold. (Investors need to start thinking of values in terms of ounces of gold instead of dollars, because that is where we are headed) What this means is that, while it is possible that the price of oil could still increase in terms of dollars, the price of gold will increase to an even greater degree.

There will be no deflation in terms of dollars

Right now, everyone is buying dollars and US treasuries based on the idea of price deflation in terms of dollars. Here are a couple of headlines evidencing this thinking:

Deflation Monster Coming as Credit Losses Far Exceed Capital Injections
U.S. Dollar Has Entered a Multi-year Bull Market

(The US dollar in a "Multi-year Bull Market"? That must the most over-optimistic, out-of-this-world thing I have heard this year.)

I would like to point out that the stock and credit market would already have crashed several times this year to a much greater degree if not for the constant stream of interventions by the fed and treasury. In other words, the results of this housing and credit collapse
have already diverged from what happened during the Great Depression due to the creations of trillions of dollars through money printing and government guarantees. While trying to prevent a 1929-style crash, the fed has vastly increased the supply of dollars in relations to the world's limited supply of gold. The dollar's rally due to deflation fears these last three months is therefore based on a false premise.

The US dollar has already its status as the world's reserve currency

The US dollar has already lost its status as the world's reserve currency due to the government's fiscal irresponsibility, especially over the last year. Political and financial leaders around the globe are furious with the US and its financial sector, and they are determined to move away from the dollar. Meanwhile, clever investors who see the writing on the wall are already accumulating physical gold and other precious metal, creating shortages. However, none of these signs are needed to know the dollar time has come. The simple truth is that the value of paper or fiat currencies is determined not only by the quantity in circulation, but also by the financial strength of the government which backs them. The US government is broke and has been living on borrowed time for years (from China mostly). Everyone knows the US is totally insolvent, but they continue to hold dollars because the dollar's collapse is too unimaginable.

With the dollar's collapse being so unthinkable (like the bankruptcy of Lehman), there is no political will to try to prevent it. Worse still, even if the government develops the resolve to save the dollar, it is too late: if the government stops printing/borrowing money and guaranteeing bad debt the US economy will disintegrate (the financial sector is gone in either case).

Not a good time to buy Stocks

Some very smart people, including Todd Harrison at Minyanville, believe we have seen the lows for 2008, I have to disagree. The enormous amount of money being printed to bail out Wall Street will mean nothing once a run on the dollar begins. Since the evidence indicates that the flow of money into gold is already beginning, I doubt the dollar can survive to the rest of the year, let alone a month, before collapsing.

When will the dollar collapse?

The dollar will collapse when demand in the physical gold market overwhelms demand in the COMEX. Either there will be defaults on the delivery of gold for futures contracts, or there will be a government intervention limiting the withdrawal of gold. Either of these events will be a "perception changing event" of enormous proportions. After all, who wants to stay in low interest bearing US treasuries (which are financing all the bailouts) when faced with the collapse the currency? The move out of the dollar could be so violent that it brings down the financial system despite all the bailouts to date.

(if you own COMEX gold, either sell it or request delivery and hope you are one of the lucky ones who gets their gold)

What will the dollar collapse look like?

For starters, there will be a massive exodus out of US assets. Stocks, bonds, treasuries, and anything liquid will be sold so that dollars can be transferred to safer currencies (are there any?) and gold. At the same time, the price of US imports, specifically oil, will skyrocket. With their lifesavings wiped out, I don't know how exactly Americans will deal with 10 or 20 dollar gas, but it won't be pretty.

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17 Responses to Deflation will be in terms of gold, like in 1929

  1. Anonymous says:

    Scary stuff, unfortunately it's probably true. What are your thoughts on the future of the euro, and the proposed "Gulf"- or "Gold" dinar?

    And, what can the "little people" do in such a short time, if the dollar does crash and you want to protect your wealth that's now stored in a bank as US dollars? Buy euros or Swiss francs, or something like that?

  2. "Buy euros or Swiss francs, or something like that?"

    No, I wouldn't buy euros or Swiss francs. As I mentioned before, the value of paper currencies is determined by the financial strength of the government which backs them, and, since governments around the world are in deep trouble, all paper currencies are going fall together vs gold and other precious metals.

    "What are your thoughts on the future of the euro, and the proposed "Gulf"- or "Gold" dinar?"

    The euro is in trouble, for the reasons I outline above. The proposed "Gulf"- or "Gold" dinar doesn't exist yet, but it might be interesting to look into because it will be backed by gold.

    "what can the "little people" do in such a short time, if the dollar does crash and you want to protect your wealth that's now stored in a bank as US dollars?"

    Invest money in precious metals. Check my posts on safe ways to invest in gold:

  3. Anonymous says:

    Thank you for your answer. The problem is that it's hard to get real, physical gold right now. If we have to wait, say weeks, or even longer, before the gold dealer has something to sell, it might be too late if the dollar crash comes first. Scary times.

  4. Did you try Although he has a 20 Ozs Minimum for Gold Bullion, he ships within 24 hours. (he doesn't advertise so most people don't know about him)

    (For quantities smaller than 20 Ozs, I don't know where to get them without a 10+ week delay, besides ebay.)

  5. Anonymous says:

    As you mentioned stocks won't be the place to be, however, what about gold stocks (i.e. AUY)? I'm already down so much that getting out now will wipe me out. Do you see a recovery in gold stocks once gold shoots up?

  6. Anonymous says:

    There are coin shows held throughout the nation on a near-weekly basis. you will pay a premium for gold coins, but you can put them in your hand immediately. these transactions are also untraceable and private. For those unaware of pending coin show dates and locations, link to "" and
    clink on "calendar".

  7. Can anyone answer the question about how a dollar crash will affect gold mining stocks like (AUY)? Will these stocks rally when the dollar falls or will the entire market collapse, with the dollar?

  8. Don't worry, Gold stocks will rally along with gold prices when the dollar collapses.

  9. Markg says:

    You can also buy Gold at , they are pretty good, and you actually own the Gold in a vault either in Switzerland, US or UK, your choice. They also have no debt, but they use a little known English law so that even if they did go broke, the Gold is actually not their property, but yours, so it would have to be transfered back to you.

  10. Anonymous says:

    I was seriously considering but was concerned that they would have the same problem as COMEX. Is Comex different than what's called digital gold.

  11. Yes, Comex gold is different than "digital gold".

    With "digital gold", you give your money to a third party (bullionvault or GoldMoney) which then uses it to buy and store gold for for you.

    COMEX gold works differantly. An investor deposits 10 ounces of gold into COMEX vaults (10% of contract) and then sell a contract to deliver 100 ounces at some future date. So a COMEX gold future contract is backed by 10% gold and 90% IOU. Since the biggest sellers of COMEX gold are insolvent commercial banks, it is a very unsafe investment.

  12. Anonymous says:

    Thanks. Comex sounds like a huge risk. Did realize it was futures and truly Wall Street.

  13. bob says:

    Hell no to the Mexicanadians! Death to the NAU.

  14. Anonymous says:

    Why not consider buying gold jewellery which is very common in my town as a form as investment. Supply is good and you have the real gold straight away and it can be sold back with no problems.

  15. Buying second hand gold jewelry might be cost effective way to invest in gold. However, if you buy new jewelry from a retailer you will be paying a significant premium for the gold content of that jewelry.

  16. Anonymous says:

    I don't really know anything, but in my ignorant opinion I don't think Gold is gonna be the answer in the end. I think it is gonna be such a HUGE shift in every economic way when the dollar collapses that only things with real value will be worth anything. Why does Gold have value? I think it is gonna be oil. That will be the currency of the future in my opinion or something like that that has actual value.

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