Why Are Gold and Silver Falling?
Aug 12th, 2008 | By Gary North | Category: Gold MarketA CONSPIRACY?
If you read that there is a conspiracy to force down the price of gold and silver, then you had better also be provided with a clear explanation for why this conspiracy has forced down the price of commodities across the board. It is not just gold and silver that have fallen in price.
It is the entire Commodity Research Bureau index. The CRB index is the standard index of commodities, and it has been falling since the beginning of July. If conspirators are doing this, they surely are very powerful and very rich conspirators. Writing in “The Daily Reckoning” on August 8, Dan Denning reproduced the CRB chart for the year. It is clear from this chart that the collapse is across the boards.
http://GaryNorth.com/snip/628.
This is no conspiracy. This is Austrian School economic theory in action.
I think we are entering a recession that will be known as the worst postwar recession since 1981. If China’s central bank slows down its 20% per annum increase in M1, as I expect that it will after the Olympics, then we can expect this recession to be international. If that is the case, then this recession could last longer, and actually be worse, in the 1980-81 recession. It may not be worse in the United States, but it will be worse worldwide.
The United States has gotten rid of a great deal of manufacturing employment since 1981. We are more of a service-based economy. This means that we are less threatened by decreases in consumer demand. Consumer demand usually focuses on decreased purchases of goods rather than services. This is why recessions have such a negative effect on commodity prices.
I think we are in only the preliminary stages of a housing recession. Because we have not had falling housing prices
nationally since the Great Depression, it is legitimate to call this a housing a depression. This is not happening only in the United States. It is taking place all over the world. It is especially taking place in English-speaking nations.
So, the supposed engine of economic growth, internationally and nationally, the housing market, has gone off the tracks. It is not going to go back on the tracks in 2009. I will regard as nearly miraculous if it goes back on the tracks in 2010. So, we had better be getting ready for a major recession that lasts for over a year, and could conceivably last for two years.
This is why I do not expect any additional bubble markets over the next two years. We have seen that the real estate
market was a bubble market. It is in steady fall, and there is no indication that it is about to reverse.
When a bubble market pops, he does not recover soon. Think of the NASDAQ stock index. It peaked in March of 2000 and 5040.
It is now around 2300. That was a classic bubble market, and has never recovered. Those who thought it would recover find themselves down over 50% in terms of their equity, and down over 20% more in terms of purchasing power of the dollar.
Nevertheless, they hung on. They thought the market would recover. They were wrong.
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CONCLUSION
The Federal Reserve System can and will eventually inflate. I monitor the adjusted monetary base. I post it on my website. It has moved up sharply in the last month. This does not mean that this is guaranteed to be a new trend, but it does indicate that the Federal Reserve System has inflated more rapidly than it has in over five years. So, I do expect long-term price inflation. But I do not expect this to take place over the next year or two. I think price inflation will slow. It is conceivable that we could get price deflation for a few months, depending on the severity of the recession.
The housing market is sufficient, in and of itself, to keep the American economy in a recession mode for the next year. I expect to be a buyer of houses sometime over the next three years. But this recession should not be underestimated with respect to commodity prices. You should not expect the commodity bubble reappear in the next 12 months, unless there is war with Iran.
Given what happened on Friday, August 8, do not discount the possibility of war with Iran. Governments do stupid things. On Sunday evening, August 10, “60 Minutes” ran its earlier show on the possibility that the Israeli Air Force is prepared to attack Iran. The first broadcast was scary enough. The second was even more scary.
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Gary North, at the age of 25, was the youngest elected member of the Economists' National Committee on Monetary Policy. He has served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul.
