Comments on: Buy Gold Now… It Should Logically Be Trading at $3,000 http://www.contrarianprofits.com/articles/buy-gold-it-should-logically-be-trading-at-3000/6267 Access market-beating ideas from the world's top investment gurus on stock market investing, the gold market, ETFs, Forex trading and real estate values. Tue, 24 Nov 2009 15:08:08 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: Scott http://www.contrarianprofits.com/articles/buy-gold-it-should-logically-be-trading-at-3000/6267/comment-page-1#comment-5296 Scott Fri, 17 Oct 2008 15:02:44 +0000 http://www.contrarianprofits.com/?p=6267#comment-5296 I have a theory on why gold isn't reacting as expected today. Gold increases in price during times of instability which we have in spades and inflation. We are currently going through a monetary deflation. I realize that sounds counterintuitive considering the billions of dollars that are being thrown around but consider where the money is going? In a fiat money system the banks have the ability to create money out of thin air. They have gone into hyperdrive over the past decade doing that by increasing leverage. Morgan Stanley CEO mentioned they were over 30 to 1 at one point and many European banks are over 40 to 1. Now they are targeting to get back to under 15 to 1. That is a lot of money that is coming out of the system. Normally that would cause a huge amount of deflation in the economy as a whole and probably a very deep world wide recession. The Fed and counterparts in Europe are flooding the system with money to keep that from happening but they are barely maintaining the level in the pool. This is also the reason that everyone is so concerned about interbank lending. Why should a bank lend to another bank? So they can create more money. It is the way our system is designed. Bank A loans 100 dollars to bank B. Bank A now has an asset on its books of the loan. Bank B now has the asset of the cash on its books. It goes and lends money to a consumer (say $95 to stay within their funding requirements by the Government). Now bank B has a $95 loan on its books as an asset +$5 cash and the consumer has $95. He goes to Bank A and deposits it. Bank A can now loan another $90 to bank B and the cycle continues. Without interbank lending money supply dries up. With excess money supply, deflation sets in. Gold doesn't rise in a deflationary setting. Will gold eventually shoot up? I think so because of response delay. The Fed/ECB will overshoot the amount of money to keep deflation at bay. Eventually we will have rip roaring inflation as we bottom and banks start loaning money to each other again. When? Probably in the next year though we could have some more downside as the Feds/ECB will be selling gold to help pay for some of those billions of dollars they are firing with abandon. Gold is an excellent place to keep some money though for the next year steel, black powder and ag commodities (guns, ammo and the ag products you eat). Gold will see its heyday but when it does we are closer to the end of the fiat system in America and a far greater upheaval than we see today. Once that happens we will look back at the decade of the 2000's as the quiet before the storm. Scott I have a theory on why gold isn’t reacting as expected today. Gold increases in price during times of instability which we have in spades and inflation. We are currently going through a monetary deflation. I realize that sounds counterintuitive considering the billions of dollars that are being thrown around but consider where the money is going? In a fiat money system the banks have the ability to create money out of thin air. They have gone into hyperdrive over the past decade doing that by increasing leverage. Morgan Stanley CEO mentioned they were over 30 to 1 at one point and many European banks are over 40 to 1. Now they are targeting to get back to under 15 to 1. That is a lot of money that is coming out of the system. Normally that would cause a huge amount of deflation in the economy as a whole and probably a very deep world wide recession. The Fed and counterparts in Europe are flooding the system with money to keep that from happening but they are barely maintaining the level in the pool.

This is also the reason that everyone is so concerned about interbank lending. Why should a bank lend to another bank? So they can create more money. It is the way our system is designed. Bank A loans 100 dollars to bank B. Bank A now has an asset on its books of the loan. Bank B now has the asset of the cash on its books. It goes and lends money to a consumer (say $95 to stay within their funding requirements by the Government). Now bank B has a $95 loan on its books as an asset +$5 cash and the consumer has $95. He goes to Bank A and deposits it. Bank A can now loan another $90 to bank B and the cycle continues. Without interbank lending money supply dries up. With excess money supply, deflation sets in. Gold doesn’t rise in a deflationary setting.

Will gold eventually shoot up? I think so because of response delay. The Fed/ECB will overshoot the amount of money to keep deflation at bay. Eventually we will have rip roaring inflation as we bottom and banks start loaning money to each other again. When? Probably in the next year though we could have some more downside as the Feds/ECB will be selling gold to help pay for some of those billions of dollars they are firing with abandon.

Gold is an excellent place to keep some money though for the next year steel, black powder and ag commodities (guns, ammo and the ag products you eat). Gold will see its heyday but when it does we are closer to the end of the fiat system in America and a far greater upheaval than we see today. Once that happens we will look back at the decade of the 2000’s as the quiet before the storm.

Scott

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