Harry S. Dent | Tuesday, May 28, 2013 >>
Since the crisis of late 2008, gold has responded to any signs of increasing money printing.
Gold bugs have assumed that if central banks were printing money we’d get inflation – if not hyperinflation – and gold would be the ultimate inflation hedge. After all, gold was one of the best single investments during the era of inflation from the late 1960s into the 1980s.
But we all know where that assumption gets you (ass-u-me)…
And our research shows that the 20-year inflationary period had nothing to do with central banks.
Quite simply, it was the summer economic season… and inflation is what happens in an economy moving through this period of the 80-year cycle.
Think of inflation as a rising temperature…
In the 1960s, it rose more modestly, just like spring.
Then, in the 1970s, the economy was hot and sluggish, just like a humid summer in New Orleans. Economists called this period stagflation, but they had no idea what caused it. It certainly wasn’t money printing. In fact, it had nothing to do with the Fed, which kept raising interest rates to fight inflation.
No, something else was going on during those years, and we know what…
The driving force behind the inflation of the summer economic season was the cost of educating and incorporating the massive Baby Boom generation into the workforce.
The economic boom that followed, from 1983 to 2007, was the Baby Boomer-driven spending spree, which resulted in falling inflation and a bubble boom fueled by accelerating debt. And this is exactly what happens during the fall economic season.
When that fall bubble boom bursts, and the economic winter takes hold, financial assets fall, debt deleverages, and you get… you guessed it… deflation in prices.
And no matter what the Fed or central banks the world over tried to do, they have been – and will continue to be – largely powerless again the effects of the economic seasons.
The truth is, we’re in a long deflationary downturn. We’ve been there since 2008. We’ll stay there until around 2023. (By the way, I predicted this over 20 years ago in The Great Boom Ahead.)
In this environment, it’s very hard to create inflation…
Central banks are actively fighting deflation and debt deleveraging. They’re injecting money into the financial systems to save the banks at the expense of savers and mortgage holders (who should have had their loans written down to fair market value after the banks went nuts!).
If the Fed is fighting deflation, then that is the trend!
And gold is NOT a deflation hedge! In fact, gold shrinks away from the cold economic conditions.
The question is, why has such unprecedented money printing not created more significant inflation? Why are gold bugs suffering their current fate?
Because all the money the Fed created is not being used by those who ultimately drive the economy: You and me.
We’re not spending all that money because banks aren’t lending it. Instead, they’re using the monetary injections to increase their reserves, to protect against future losses. So all that money is just sitting somewhere, doing nothing.
They’re also using some of the money to invest, often at high leverage to explode their profits, because they’re not making much money on the lending game anymore. That’s why markets are going up while the economy is barely growing.
That’s why we’re not seeing the kind of inflation you’d expect from the level of quantitative easing and loose monetary policies currently in vogue.
That’s why gold has endured a painful slide from $1,934 to below $1,323… and why it will head down to $750/ounce, and ultimately likely much lower.
Gold finally gets it.
Gold is very oversold after the recent flash crash and it should enjoy a substantial bounce ahead. But ultimately, this precious metal will sink like a stone. Stay tuned.
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