Aside from a brief rally midweek, gold moved decisively lower and is now down for the month as well.
Gold brought the ungrateful trading week to a close down another $20.30 to $1,721.60 and silver was off $0.76 to $32.05, for an ending silver/gold ratio of 53.7.
Right now it’s difficult to separate trends in gold and silver prices from the general declines in the global economy and equity markets. Investors sell hard assets to raise cash to cover losses in equities, hence it’s not at all unusual to see precious metals prices track briefly with equities during times of sustained selling.
Sure, I can point to currency policy and restate that the Federal Reserve and entral banks around the world are still diluting their currencies but that doesn’t explain the lack of inflation which would be the component driving gold prices higher.
I believe deleveraging is why we haven’t seen runaway inflation. For decades consumers and the U.S. government adapted to the debt economy; debt became an integral component of our financial lives, both public and private. Debt became a form of currency, how business was done.
It all added up to a massive pile of debt, a financial Pearl Harbor, and the bombing started in 2007. Suddenly assets purchased with debt lost value but the full value of the liability remained. Families saddled with the American dream of debt lost jobs and were forced into bankruptcy, crushed by the weight of debt they couldn’t pay back. The reality of leverage hit home like a branding iron on the consciousness of America.
People, companies and government at all levels started paying off debt, deleveraging in the parlance of economics. I believe it is that process of deleveraging, which will go on for years to come, that is keeping inflation in check. It’s also one of the reasons additional stimulus is not generating growth. Instead of buying things, people, governments and companies are using extra money to pay off debt. When there is no demand for goods, prices tend to stay in check. Tame inflation then feeds back as a damper on gold and silver prices.
Deleveraging will go on for a while, but not indefinitely. Inflation will happen and people will act surprised when it finally lands. If you’re not saddled with debt, now is the time to be buying hard assets, including gold and silver, as a hedge against the inflation that will surely rock our world in the days ahead.
Chris Poindexter, Senior Writer, National Gold Group, Inc