romans holiday

I've had 50% of my worldly worth in gold for some time now, and consider myself pretty much all in. As gold has been rising, so too has that percentage. If one was wanting to buy but felt a little nervous at these high levels, it might pay to think of buying gold as a currency swap; swapping a weakening currency for a strengthening one.

What will be the mechanism for inflation in developed economies? Here's Andy Xie's take on it... call it "Boomerang inflation" [i'm not so sure about this myself for the forseeable future - five years or so -, and think a mix of a collapse the Chinese bubble, market destruction, and demand destruction might serve to counter-balance any upward pressure on prices say in US dollars and Yen.... pounds is another story]: AEP's latest. Similiar point, but asks if it will really be so easy to pass inflation on to the consumer this time: http://www.telegraph.co.uk/finance/china-b...ging-wages.html

Hi DrNo, welcome to GEI. Yes, the idea of the thread was to see if there were some similarities to Weimar even though a Weimar-like hyper-inflation of the currency might not eventuate. I see the currency subjected to the cross currents of both inflation and deflation; certain currencies can depreciate on the world stage as capital moves to stronger currencies, this could lead to inflation in the prices of consumables/ commodities etc, the currency may also appreciate against assets as populations look to pay down debt and/ or save in an ongoing credit contraction. Of course, central bankers do not want money sitting in banks but moving into the economy hence the QE. Whether inflation is here real or imagined is the point of contention. Personally, I think this is negated by a liquidity trap though QE remains a "credible threat" driving investors to speculate in a very risky market. On the other hand, the behavior of the wider population [which is not so easily contolled by cental banks] is not motivated by inflation expectation, and will just continue to save and/ or pay down debt, which is deflationary. If deflation is the primary force then savers need not speculate but should instead buy and sit in the strongest currencies. Real investment is needed in the economy [as opposed to speculation in the finacial market] yet this might not be seen until imbalances are worked out of the system one way or the other. The deleveraging of debt has to occur for the developed economies. Also, the currencies of debtor and creditor countires need to be re-balanced. This may yake time, and until then the economy could just continue in contraction mode. I'd add that gold could do well as a currency when other national currencies are under the shadow of QE.

Cheers. Though the nominal numbers can be argued, that ratio is always a good one. I think the Dow will follow the Nikkei down.

No argument here on that chart. I fully expect to see the ratio of gold/ Dow back to around 1:1. I've always thought the nominal number involved would be relatively low..... say around 3000. the Dow could likely do a Nikkei. Well, I consider the attempt to create a "scientific" currency also the attempt to manipulate/ control the population... science being primarily about power. Everyone, governments included. were/ are caught up in this web.

I find gold as priced in GBP quite interesting. As a major currency, I don't think the pound will blow up, but will instead be very unstable as capital moves in and out. In contrast, gold should remain relatively stable against reserve currencies. This would lead to quite a volatile GBP price as we've already seen. The corrections are over 10%. Having already a core overweight position in gold, I may look to put a smaller percentage of that to work trading pounds for gold.. with the aim of course to take profits in accumulating ounces. This could involve selling a bit when it spikes to around 1000 and buying again at around 850 or so. Pound looks like it wants to head south again. No doubt followed once again by a decent bounce.

This is progress. Modern economists, with their idea of a scientific currency, attempted to bring "value" into the domain of objectivity. It can't really be done. To ask how we can objectively and rationally measure value once and for all, you might as well ask how many angels can dance on the head of a pin. What's going on here is a confusion between the objective world of measurement, and the "metaphysical" [beyond the physical] world of valuation. Some things are the objects of mathematic measurement, somethings aren't.... but that doesn't make them any less real. imo the whole sorry saga of boom and bust is due to the failure to recognise that human valuation, being idiosyncratic, is very precarious and can change quickly with changing circumstances. In the boom periods, populations think the "problem of valuation" has been normalized. This normalization usually takes form in some new progressive financial instrument that assumes "traditional" risk can be measured and managed. Hence there is no need for conservative fuddy duddy regulation. After the bust, high capital reserve ratios and regulations are once again restored [hopefully] along with the recognition of our inherent gullibility. I think we agree that the monetary unit itself now is problematic as a measure of value. Yet, I think this is more likely to lead to increasing instability between currencies rather than the hyper-inflation of them.

imo my opinion, the solution to the problem you've posed here [in regards to weak currencies and rising essentials] is to maintain a core position in the strongest currencies. This way you will not be driven to speculate, which is a game most lose. By just sitting in the strongest currencies, your currency units should appreciate in value over the long term against assets/ commodities/ consumables [a Jesse Livermore quote is coming to mind]. In the strongest currencies, commodity/ consumable prices should be less volatile to the upside. If they do spike, it shouldn't take long for them to fall back due to eventual demand destruction.

Gold out-performing silver: Looking at the above, the one to trade [if so inclined] on a spike would be gold/ pound. The pound depreciates against gold as it spikes; sell a bit of gold for pounds. When the pound bounces back and appreciates buy back gold. O'Brien should have sold for a major currency rather than a reserve currency. A reserve currency is best to hold in reserve in case we get the big dip.

Looking at the above, the one to trade on a spike would be gold/ pound. The pound depreciates against gold; sell for pounds. When the pound bounces back and appreciates buy back gold. O'Brien should have sold for a major currency rather than a reserve currency. A reserve currency is best to hold in reserve in case we get the big dip.

That's interesting. Of course the logical outcome of increasing currency instability is government intervention along the lines of a new Bretton Woods down the road. I'm assuming Armstrong wouldn't care much for this as he is pretty much a free market fundamentalist. But then does it really matter what we think ought to happen on doctrinaire grounds? I reckon it's best to ask what is most likely to happen.

Good call. I made a similiar: http://www.greenenergyinvestors.com/index....st&p=178177

Does anyone know if Tom O'Brien will be buying back in here? He must be a little anxious after being in a 10 year bull run and then selling his position on the last spike. [i think he was looking for 1075]. I found that a bit odd at the time... why would you sell your whole position? Surely, he only sold a part. I don't trade gold, but if I felt the need to then selling a little on a large spike wouldn't be that risky... as long as you were prepared to buy back in either on the dip at a profit, or if it doesn't dip much - as looks like the case here for O'Brien - buy back as it approaches where you sold [a stop-loss of sorts]. There would be no profit involved but at least your position in gold would be regained.

All a bit too... Manichean for me.

Yes, which is why in the UK's case the currency could well depreciate against consumables, imports, commodities etc as capital flows out of the UK/ Sterling. But then consider demand destruction/ destruction of markets/ lowered standard of living could lead to downward pressure on prices canceling out some of the rises. But hyper-inflation of the currency looks very unlikely, and UK property should still come down in terms of pounds. Most likely will be continued volatility for the pound on the fx market.

In a period of growth, the financial market dominates the real economy. Now, in a period of contraction [wealth destruction] the real economy dominates the financial market. And here human behavior trumps the so-called fundamentals of investors who too often have yet to catch up with what's going on. This could be due to an ideological lag where the old ideas of investment haven't been fully discredited yet. In a real economy, subjected to a debt deflation, the behavior of the population leads to a higher valuation on money as relative to assets. They prefer to pay down debt and/ or save. This means the prices of assets will come down. Whether the prices of consumables come down, will depend on the strength of the local currency in the fx market. No hyper-inflation there... just less money, lowered velocity, and a reduced standard of living. We should respect/ observe the behavior of the "sheeple" because they will determine the value of local money relative to local assets... all to the chagrin of the monetary authorities... whom we should disrespect.

I'm not arguing that there won't be currency depreciation in real terms. What I am arguing is there won't be hyper-inflation of the currency. Regarding currency depreciation, even if the bulk of the wealth is held by a relatively small group of investors, particular currencies can depreciate against others as capital moves between them on the fx market. Taking the reverse liquidity pyramid idea, you'd see capital flowing from the weaker currencies into the stronger: Commodity currencies such as Kiwi and Aussie Major currencies such as Euro and Sterling Reserve currencies such as Yen and Dollar Natural commodity currencies such as silver and gold. So from the investor's perspective, who is motivated by a "view" on what their currency is worth in the market, the local currency can depreciate... but only against other currencies. Regarding currency appreciation, the above does not enatil hyper-inflation. Hyper-inflation involves the destruction of currencies as national prices of goods and services spiral ever upwards. This involves the behavior of the bulk of the population in the real economy. The majority of the population however simply does not have an investor's mindset*... they do not really have a "view" on the currency. Most are habituated to using a currency and identify that currency with money per se. They simply don't have all the ideological baggage that motivates investors. What motivates them increasingly now is the desire to pay down debt and/ or save. In the real economy then velocity is reduced and the currency becomes more valuable relative to local assets [perhaps eventually also relative to consumables/ commodities depending on the currency]. So there is a basic distinction involved here: +1 At the investment level - at the level of the international financial market - the local currency can depreciate against other currencies. +2 At the economic level - at the level of the real local economy - the local currency can appreciate against assets, and eventually against commodities/ consumables depending on the currency. *That we miss this point I think derives back to Friedman's collective notion that the population will not be subject to "money illusion".... or rather that all will have inflation expectation. This is a notion that is largely stuck in the minds of investors today, not in the larger population.

I don't think the central bankers are so supremely confident with the theoretical model today. What goes up can go down despite the theory. Watch UK house prices over the next few years. A theory by its nature can never be proven 100% correct, and should always remain capable of being falsified. Otherwise it is dogma not theory. I suspect the longevity of the dubious theory rode on the back of the boomer generation....and the truth is that economies are by their nature "organic" and cyclical rather than "mechanical" and linear. http://www.greenenergyinvestors.com/index....st&p=176193 All QE is doing is postponing and cushioning the decline... a rear-guard action. The theory Weimar's Havenstein clung to was also false.

Which is my point, and is the rationale for the existence of central banks. As I said, the central banks believed they could prevent deflation by managing [manipulating even today] inflation expectations, and controlling money supply. Demonstrably untrue today. They thought it could never happen due to their position. It was all based on theory. The theory is being falsified.

Monetary wealth is more likely to be eroded by speculating in a volatile market than by leaving your savings in the bank. Everyone is accusing everyone today of propaganda, but consider that it suits the monetary authorities to get as much money moving out of banks as possible. In deflation, monetary units appreciate in real terms. The chase for returns is a habit that will die hard among investors. The other option to hyper-inflation is the one right before our eyes in Japan. We'll probably see another QE or two, but it will remain ineffective. If the government really wants to get money into the economy it would have to fiscally spend big time on infrastructure and jobs, but I doubt there is the political will for this now that the tide is turning against debt at the political level. I think they stuffed up by a focus on recapitalizing banks. But then no matter what they did, the economy was well overdue for a contraction phase. What's so bad about that? Opps..... all that debt! The big stuff up was the monetary system of fractional reserve and the financial alchemy which allowed it to go into over-drive due to weak government. The government was also weak in Weimar, where another deluded bank pursued an insane monetary policy. imo we have already had the inflation stage [in debt/credit], and rather than now going into a crisis stage typified by hyper-inflation, our crisis will be typified by deflation/ depression.

The governments, central banks, and their economists all thought a deflation could never happen. The generally accepted idea was that by managing inflation expectations and controlling the money supply, the economy and inflation could tick along at a nice even 2% or so. This idea is now not so generally accepted. It must be quite an unnerving experience for those who thought they were in control to now realise they aren't. Anyway, even though I don't think we will see a Weimar-like hyper-inflation of the currency, I don't doubt that the developed economies are facing a crisis. Just that this crisis will take a different form to Weimar.

But consider that in our monetary system, money is created by "shorting" the currency; it's a balance sheet where debt on the one side balances money created on the other. If a debt deflation has set in, then this amounts to an extended period of short-covering on the currency; existing dollars, pounds etc will become more valuable as the population seeks these dollars and pounds to pay down debt. I don't see how hyper-inflation can eventuate here. What looks more likely is asset prices will continue to decline as actual money [liquidity not debt] becomes more valued. This may even play out in lower commodity prices and then consumables. If governments continue to fight this by taking further debt onto the public balance sheet, gold will continue higher. I think it would continue higher anyway given that the international currency system is destabilized with the collapse of asset values in developed countries. [whereas in Weimar it was the savings of the middle classes that got squeezed, today the equity/ monetary value of assets of the middle classes are being squeezed]

Commodities can spike on speculation, but if higher prices can't be supported in the real economy they will slump again. There has to be either increasing real demand, or a depreciating currency to maintain higher prices. imo it is only investors who, for primarily ideological reasons [monetarism/ money printing etc], see the currency depreciating. The bulk of the population is valuing the currency more as they pay down debt and/ or save.... this is motivated by the reality of debt.

The middle classes once again will get slaughtered in the market doing exactly the wrong thing... speculating. For money velocity to take off.... it has to be seen in the real economy, not as speculation in the financial market.

An eventual debt deflation worldwide due to the intertwined nature of the global economy and the currency system.