OPINION
Dollar vs. Gold In A Dual Inflation-Deflation Economy Part 1
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By Doug Eberhardt
Every time you hear “the dollar’s down” or “the dollar’s up,” what exactly does that mean? If they say the dollar is currently trading at 76.54, as it is today, what does that tell you about the relative strength of the dollar or its purchasing power? The truth is, it doesn’t tell you much at all.
I began to make this case in Why Gold Is a Better Currency Indicator Than the U.S. Dollar Index. In this article I will further explain how looking at the dollar as represented by the dollar index alone doesn’t paint a complete picture and how inflation and deflation are occurring at the same time and what that means for gold investors.
The Dollar Has Been Up and Down the Last Three Years
We can see from the following chart that the dollar, as represented by the Dollar Index, has been above and below the 80 line a couple of times in each direction the last few years. Does this picture paint whether we have inflation or deflation? How?
Inflation and Deflation Have Battled It Out the Last Three Years
While the inflationist and deflationists battle it out, what’s important to everyone is the purchasing power of the dollar. We have clearly had an inflationary bout the past 8 months with food prices and oil bouncing off their post financial crash of 2008/2009 lows. But is this really inflation, defined as an increase in the money supply? Yes, we have seen the Federal Reserve implement quantitative easing (QE2) to the tune of $600 billion at the end of last year and the dollar has fallen since that time versus other currencies. But didn’t we have $2 trillion of the first round of quantitative easing? How come the dollar didn’t fall like a rock during this first round of easing which was more than three times larger than the latest round of easing? How come the treasuries actually increased in value during the time frame of the $2 trillion easing? What excuse did the inflationist have for this result?
Take a look at TBT, the ultra short 20 year treasury the last five years. Is there a sign of inflation in this chart? If so, then why has the 20 year treasury got stronger during the last five years? Yes, I do realize there is a current upswing that is taking place, but does that paint a true picture of what’s occurring since June of 2008? All of this prior inflation was eaten up by the credit contraction occurring…the unwinding of all the credit that was extended during the boom period (see Part 3 for more on this). There is still much of that credit hanging over our heads.
What Does the Price of Oil Tell Us About Inflation?
As of yet, oil is still 30% below its July 2008 high of just north of 130. Some of the reason oil is priced higher has nothing to do with the dollar, but rather Mideast turmoil surrounding the revolutions in Egypt, Libya and elsewhere. This disruption has driven the price of oil higher. This should not be misconstrued as a result of inflation.
The fact of the matter is, the BP disaster in the Gulf of Mexico contributed to the rising price of oil too and while the dollar was rising from November 2009 to May of 2010, oil went from around $50 a barrel to almost $90 a barrel. Look at the dollar Index chart above and notice the dollar rising in value during this time versus the chart below showing oil rising in value along with it. Does this indicate inflation? Does this paint a clear picture of the value of the dollar? It’s not all as black and white as some would have you believe.
What Does the Price of Corn Tell us About Inflation?
Inflationist will point to the CRB index and the price of corn for example to show how inflation has kicked into gear. But supply and demand also play into this picture too. China and India had an increase in demand and more recently there has been a shortage of corn supply. Jim Rogers predicted this in January of 2010. It’s not just a dollar/inflation issue. Supply and demand also have to be taken into account.
Government Induced Inflation
Anything that the U.S. government is involved in that causes higher prices (health care, college tuition), can’t be associated 100% with normal inflation (increase in money supply) because these are not free market programs. Colleges raise their fees and governments provide the bigger loans to the students. Cost of health care goes higher and Medicare/Medicaid pays the bill. There is no free market to allow companies to compete for business when the government pays the bill. In the end though, it is the student and the tax payer who ends up paying more.
Continue to Part 2
Related posts:
- Gold Resumes Trend Higher As Dollar Breaks Down
- What Does the Price of Gold Do In Deflation? UPDATED 10/12/2010
- How A Deflationary Credit Contraction Will Unfold Part 1
- Why Are Gold and Silver Prices Falling As Dollar Declines?
- Why Gold Is a Better Currency Indicator Than the U.S. Dollar Index
About the author – Doug Eberhardt, author of the book “Buy Gold and Silver Safely.” He has been exposing the bias against buying gold as part of a diversified portfolio from journalists, CFPs, CFAs, economists and others.
He simply wants the truth to be known about buying gold and silver and challenges anyone as to whether they should be a part of everyone’s portfolio.
He was a financial advisor for over 20 years and left the business to write about how the financial services industry has programmed the minds of most investment advisors to be biased against buying gold and silver investments while at the same time utilizing flawed models of diversification and out of date theories that no longer represent present day investing.
He has written a book to help investors understand how to buy gold and silver, what gold to buy, how gold and silver fit into a diversified portfolio as well as exposing the Gold Dealers tactics to separate you from your money. His book, “Buy Gold and Silver Safely” is available here on his website, Amazon.com, and Kindle. Also coming soon to Barnes and Noble and Borders.
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10 Comments
Hi Helen, and Hi Doug,
I think this is a critically important piece for you to ponder.
http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=17501:disinformation-and-silver-confiscation&catid=49:silver-commentary&Itemid=130
From venice’s link –
“Know that “silver confiscation” (at least inside the United States) is now a foregone conclusion. This leaves us silver-buyers with several tasks in the weeks/months ahead. As I just stated, part of that “mission” involves denouncing and separating ourselves from the rabid-ranters – to weaken and hopefully destroy the banker-illusion that conserving the tiny, remaining silver inventories is supposedly some form of “economic terrorism”.
For silver-buyers inside the U.S. (and for those buyers outside the U.S. who also have little trust in their government), there are other measures we can and must take. Obviously the sheep have been steered into “bullion funds” and “bullion accounts” by the financial community for one very good reason: it takes nothing more than a few mouse-clicks to confiscate any/every ounce of silver (and gold) held in those funds. Thus anyone with a bullion “fund” or “account” with that bullion stored inside the U.S. should immediately liquidate all such holdings.
The proceeds from the sale of those units should (naturally) immediately be used to replace your “paper bullion” with real “physical” bullion in your own custody. Thanks to “The Patriot Act”, U.S. safety-deposit boxes are no longer safe. They will obviously be the second stage of any bullion-confiscation campaign inside the U.S. This means that U.S. residents must find a personal means of storing/protecting their bullion, as the time, effort and “political damage” which would result from sending government thugs to “bust down doors” and loot the bullion of individual citizens is hopefully a price that even the U.S.’s two-party dictatorship is unwilling to pay.”
venice, I’ve asked Doug to weigh in. Hopefully, we will hear from him sometime today. as always, thank you for thinking of us and sharing ‘must know’ information. Hope all is well.
Hi Venice and Helen,
First, thanks for posting the article Helen!
Regarding confiscation, there was a guy who wrote a long, overall, well researched piece on silver confiscation. He came on my site and replied to an article on confiscation nonsense. I presses him for an executive order number as all he had to go on was a newspaper clipping. He has not responded.
There will be no silver confiscation or even gold until they get rid of the second amendment. They are not going to go around to everyone’s home, knocking on their door, asking; Do you have any silver silverware, dishes and sugar holders. Impossible to pull off.
Much easier to go after 401k holdings, ETFs etc., but you would have a revolution by morning.
I know some people can present a good case for confiscation, but not gold and silver, and not in this day and age.
Feel free to comment….
Hi Doug,
Thank you for prompt response. I can’t attest to what governments anywhere will do or not do, but I think the point of Neilsen’s article is that one should not make it easy for them. Hence the electronic paper trail is what he is referring to, not that which you hold in your physical possession. He certainly agrees that “knocking at one’s door” is stretching it.
Unfortunately, the world is too savvy by now, so the emphasis here is to leave as few possibilities open to the PTB to protect their own vs. that of the people.
Helen, Doug et al.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/11_Jim_Sinclair.html
Please listen to this extraordinary interview. Sinclair I believe is in a category of his own.
Hi Venice, yes, electronically the govt. has the ability to do many things. At the same time, I don’t think they want us coming at them with hatchets if they mess with our investments.
IMO, the powers that be hours of existence are numbered by the days the banks stay afloat via the Fed’s continued bailouts. They are in too deep a hole to be dug out. It’s not a far stretch that the banks will need much more help in the next 5 years. When that day of reckoning will come, in one year or at year 5 is the only question left to be answered in my mind.
What are their choices?
As far as Sinclair is concerned, he makes many good points. I only disagree with what he has said in the past, that we are moving towards a one world currency. I am not in that camp. We already have one (actually two): gold and silver.
But you knew that was coming!
I still think, believe it or not, the U.S. Dollar is still king, but it is the banking system frailty that will finally bring it down.
Hi Doug,
Thanks for your response. What mess we’re in!
I guess to give substance to what I said, it was the failure of the banks at a high rate that caused people to lose faith in FRN’s. This in turn caused the government to stop the conversion.
Today, banks are still failing at an alarming rate. More would have failed, a lot more, if the FASB didn’t allow them to cheat by marking their assets to fantasy. But since banks can’t make money the old fashioned way, by fractional reserve lending, they have to go to the derivatives market to make a profit. We now sit at over $4 trillion of sub-investment grade derivatives maturing in the next 1-5 years, more than at the height of the crisis.
Who will be the counterparty to these derivatives but the Federal Reserve via more bailouts? It’s that or they default. Either way, there’s trouble afloat…
What a mess indeed…
Y’all are depressing me, but it’s reality. Curious question. Although we started out w/a small bank that was eaten up by the big guys, we are considering closing said accounts and moving them. The question I have is where too? Maybe a savings and loan or a credit union. We are currently a client of Wells Fargo who I loathe. Any advice? Suggestions?
btw, Doug, thank you for weighing in today. Always appreciate learning your perspective on current happenings.
And venice, always value your keeping us here informed and preparing us to be at the ready.