Deflation file: All commodities but gold are now bust.
21 Oct 2008 7: 47 am | Filed under: bear markets, commodities, deflation, goldThis is a chart post. All materials prices are now way off their peaks, many having retraced the entire manic phase from 2005-2008. Shipping costs are down, too. This is what deflation (aka credit contraction) does.
Here first are the grains (charts from CBOT):
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Metals now. All charts from Kitco.
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Here is the Baltic Dry Index, a measure of the cost of shipping dry bulk materials (Bloomberg):
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Given the strength of the declines in other commodities, I am now calling for $500 gold, not $600, and I am not ruling out $400. Everything else should continue to fall as well. To hedge against the big inflation/currency failure that will follow this deflation, you could buy any commodity or basket of them, but gold’s density and liquidity make things easy.
Gold is a form of money, so it is logical that in deflation it should rise relative to other commodities, even while falling relative to paper for a while. This is setting up as the perfect opportunity to exchange fiat money for the real thing, just before the fiat fails.
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Bjorn
October 21st, 2008 at 9:04 am
Hi Mike,
When fiat money “falls flat” are we essentially talking about hyper-inflation? Is hyper-inflation the big threat that looms ahead for the fiat currencies of the world? Or, is there even a worse fate awaiting the currencies of the world?
Also, do you have any thoughts about services such as “goldmoney.com” which allows you to own allocated gold and buy and sell it electronically? Not the same as coins in hand/vault, but do you think it has any serious merit considering the times we are soon to be entering. That particular program uses a vault in England, I believe. I could be wrong about the location.
I am considering my options for holding gold. I once thought I had it figured out, but a bad experience with a Swiss outfit that was touted as the best in the world has left me reconsidering things.
Thanks much
Mike
October 21st, 2008 at 9:09 am
James Turk seems to have a good grasp of the political risks involved in this issue, and he has done his best to build a robust system. There is of course no perfect solution, but I don’t see a problem with using this service or bullionvault (very similar, but with cheaper spreads) for part of one’s holdings.
Mike
October 21st, 2008 at 9:13 am
Hyperinflation is one way for a currency to fail. Ordinary bad inflation followed by a replacement currency is another. Who knows? All we can tell now is that the US, UK and other governments are broke and must default on their bonds somehow. Inflation is a preferred solution of politicians and bankers, but it is also possible for there to be outright defaults on bonds and social welfare promises, in which case the currencies would not have to fail.