http://www.garynorth.com/public/3992.cfm
Note: the label does not apply to Gary North, but to the subjects of his article.
Update:
15 Sep Additional from Gary: http://www.garynorth.com/public/4002.cfm
16 Sep Hommel's reply to Gary: http://silverstockreport.com/2008/shortagefeedback.html
Deflation or Inflation?
Two scenarios are receiving increasing attention in assessments of the US economic outlook – inflation and deflation. Some assessments favour a combination of both – such as a severe deflation followed by inflation, or hyperinflation. Others feel that successive development of alternating deflationary and inflationary periods of increasing intensity is more likely, leading ultimately to a collapse of confidence in the US economy.
With the inflationary scenario, the rise in total US debt becomes so extreme that the level of interest rate required to attract ever higher international capital inflows seriously damages GNP growth. Faced with this dilemma, the Federal Reserve will have no choice but to relax its policies (as it is currently doing), and expand money supply with ultimately inflationary consequences. The interest rate reductions will debase the currency by allowing the real value of debt to be inflated away, a collapse in support for the USD abroad, and together with a retreat into gold by many USD holders.
With the deflationary scenario, proponents see similarities between the 1930s and the current situation. In their scenario, the debt explosion becomes too large to be serviced in many parts of the economy. Asset liquidation becomes endemic, forcing prices down, creating debt deflation in a vicious downward spiral with continuing attrition of debt collateral. Personal incomes and consumer confidence plunge, causing a contraction in spending. As faith in the USD evaporates, there is a flight into gold and other safe haven currencies.
The position of the USD as the major international reserve currency is pivotal to the unfolding of either scenario. The prospect of currency debasement through a monetary reflation by the Federal Reserve would undoubtedly provoke a flight from the dollar by foreign investors. Such a flight would cause a quick reversal of Federal Reserve policy and a surge in domestic interest rates, in an attempt to maintain investor confidence. This move would eventually undermine the corporate sector by raising debt servicing costs in an economy in recession, thereby ultimately triggering a credit collapse with consequent deflationary effects.
It is not possible to prove or disprove these theories and scenarios. Nonetheless, it is sufficient to note that the US has been on a track of increasing financial instability for 40 years and that inflation has been checked only by periodic credit crunches which have triggered debt crises, followed by another round of monetary stimulus.
Nevertheless, the evidence now accumulating in the financial and banking sectors suggests that the outcome is more likely to be a deflationary depression. There is no evidence of new developments in the US economy at this time that might transform international disinterest in the USD. Consequently, the US deficit will have to be internally funded in the future – unless the authorities choose some unforeseen strategy such a mobilising US gold reserves into gold swaps. The question is, however, whether internal funding is a practical option under the circumstances?
The old remedy of inflating out of this predicament by issuing cheaper and cheaper money into the banking system simply will not work this time. The reason is simple – the country is already awash with too many debtors.
Corporations, individual, and the Federal government are already suffering from a gigantic surfeit of debt, from the highest debt total to GNP levels in recent US history. The Federal Reserve can no longer make the inverted debt pyramid grow because the debtors in it are too illiquid – they are unable to go further into debt – no matter how attractive the authorities make interest rates. The lever of expansionary money has been pulled once too often. The next phase will be the rapid descent of investors down the inverted debt pyramid from illiquid assets such as property into quality money – including gold – at the inverted apex. This phase will be prompted by a collapse in confidence in the dollar – triggered possibly by the collapse of a major bank, the stock market, and/or the bond market.
In any case, as it is made clear above, the situation now emerging has all the hallmarks of an insoluble dilemma for the US authorities. Against the background of the global capital crunch, the decline of foreign savings to fund the increasing deficit, the growing global economic contraction, the deflationary or inflationary scenarios are both insoluble. There are no solutions that do not involve a dramatic transformation of the USD in international financial markets, and its role as the reserve currency. Both scenarios ultimately lead to a flight to quality money and liquidity, out of the USD and into gold and other currencies.
------
Unfortunately I cannot take credit for the insightful words above. They were written by my former boss - Michael Kile. What is shocking is that they were written in February 1991, one chapter in a 40 page document titled "The case for gold in the 1990s", published by the Perth Mint.
Consider that I had only to remove a few sentences (which included giveaway dates and figures) for it to read as if it was written in 2008. It is worth re-reading it with the understanding that the analysis is 17 years old and realise that during those 17 years the US got away with "the old remedy of inflating out of this predicament by issuing cheaper and cheaper money".
The question is: will the US get away with it this time, or will Mr Kile be finally correct that the old remedy "simply will not work this time"?
With the inflationary scenario, the rise in total US debt becomes so extreme that the level of interest rate required to attract ever higher international capital inflows seriously damages GNP growth. Faced with this dilemma, the Federal Reserve will have no choice but to relax its policies (as it is currently doing), and expand money supply with ultimately inflationary consequences. The interest rate reductions will debase the currency by allowing the real value of debt to be inflated away, a collapse in support for the USD abroad, and together with a retreat into gold by many USD holders.
With the deflationary scenario, proponents see similarities between the 1930s and the current situation. In their scenario, the debt explosion becomes too large to be serviced in many parts of the economy. Asset liquidation becomes endemic, forcing prices down, creating debt deflation in a vicious downward spiral with continuing attrition of debt collateral. Personal incomes and consumer confidence plunge, causing a contraction in spending. As faith in the USD evaporates, there is a flight into gold and other safe haven currencies.
The position of the USD as the major international reserve currency is pivotal to the unfolding of either scenario. The prospect of currency debasement through a monetary reflation by the Federal Reserve would undoubtedly provoke a flight from the dollar by foreign investors. Such a flight would cause a quick reversal of Federal Reserve policy and a surge in domestic interest rates, in an attempt to maintain investor confidence. This move would eventually undermine the corporate sector by raising debt servicing costs in an economy in recession, thereby ultimately triggering a credit collapse with consequent deflationary effects.
It is not possible to prove or disprove these theories and scenarios. Nonetheless, it is sufficient to note that the US has been on a track of increasing financial instability for 40 years and that inflation has been checked only by periodic credit crunches which have triggered debt crises, followed by another round of monetary stimulus.
Nevertheless, the evidence now accumulating in the financial and banking sectors suggests that the outcome is more likely to be a deflationary depression. There is no evidence of new developments in the US economy at this time that might transform international disinterest in the USD. Consequently, the US deficit will have to be internally funded in the future – unless the authorities choose some unforeseen strategy such a mobilising US gold reserves into gold swaps. The question is, however, whether internal funding is a practical option under the circumstances?
The old remedy of inflating out of this predicament by issuing cheaper and cheaper money into the banking system simply will not work this time. The reason is simple – the country is already awash with too many debtors.
Corporations, individual, and the Federal government are already suffering from a gigantic surfeit of debt, from the highest debt total to GNP levels in recent US history. The Federal Reserve can no longer make the inverted debt pyramid grow because the debtors in it are too illiquid – they are unable to go further into debt – no matter how attractive the authorities make interest rates. The lever of expansionary money has been pulled once too often. The next phase will be the rapid descent of investors down the inverted debt pyramid from illiquid assets such as property into quality money – including gold – at the inverted apex. This phase will be prompted by a collapse in confidence in the dollar – triggered possibly by the collapse of a major bank, the stock market, and/or the bond market.
In any case, as it is made clear above, the situation now emerging has all the hallmarks of an insoluble dilemma for the US authorities. Against the background of the global capital crunch, the decline of foreign savings to fund the increasing deficit, the growing global economic contraction, the deflationary or inflationary scenarios are both insoluble. There are no solutions that do not involve a dramatic transformation of the USD in international financial markets, and its role as the reserve currency. Both scenarios ultimately lead to a flight to quality money and liquidity, out of the USD and into gold and other currencies.
------
Unfortunately I cannot take credit for the insightful words above. They were written by my former boss - Michael Kile. What is shocking is that they were written in February 1991, one chapter in a 40 page document titled "The case for gold in the 1990s", published by the Perth Mint.
Consider that I had only to remove a few sentences (which included giveaway dates and figures) for it to read as if it was written in 2008. It is worth re-reading it with the understanding that the analysis is 17 years old and realise that during those 17 years the US got away with "the old remedy of inflating out of this predicament by issuing cheaper and cheaper money".
The question is: will the US get away with it this time, or will Mr Kile be finally correct that the old remedy "simply will not work this time"?
Reply to a Reply
From the start, I’d like to direct readers to my About This Blog. As I say there, my blog is not a Perth Mint mouthpiece and all my comments are my personal opinion and not endorsed by the Mint in any way. If you have a question about their operations or a complaint, ask them directly yourself, I am not their complaints department.
It is also probably important to be clear that I am bullish on gold and silver, although I take a long term view. If you sense I’m taking a bearish view that may be because I am a contrarian personality type and thus have a tendency always to look at the other side of any dominant view (and challenge my own views), as I believe the truth usually lies between the extremes.
Jason writes: I also think its normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
The comments I’ve made don’t exclude inflation or manipulation as factors. It is unfortunate that many have no confidence in COMEX; thankfully Australia does not have any precious metal futures markets. All I’m looking to do is to contribute some additional things to consider that no one else in the “gold internet community” talks about. Some of these factors may be important to the shortage of (retail) silver, some not so. It is just extra information that I hope fills out the picture, as no one knows everything.
Jason writes: That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
I asked our Shop if they have 100 oz bars and they said they have them available, so instead of relying on Jason’s “reportedly”, all I can say is that if you want to buy silver, ring our Shop up and buy it. Once your money clears, they'll ship. At the end of the day, my words and Jason’s words don’t matter – actions speak louder than words. And the only action that matters is delivery. Period.
Jason writes: Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes! Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
The definition of “deal” by Encarta Dictionary within Microsoft Word is “an agreement, arrangement, or transaction, usually one that benefits all the parties involved”. This includes BOTH buying and selling. But to be clear, Nigel will SELL physical 1000 oz silver bars. Also, what I said was "he will do deals for a minimum". I did not say that "the wholesale market only deals in this minimum", you read that into my statement. That is just his minimum. He is the Treasurer for the whole Mint, not a retail bullion dealer; this is the deal size he operates at. Of course trading occurs in the wholesale market for quantities lesser than that. My point was that bulk quantities of silver are available in the over the counter (OTC) spot market. They are, and Nigel will supply them. Period.
Jason writes: AGR Matthey closed their silver operations!
Incorrect. AGR Matthey have not closed their “silver operations”. I quote from a letter dated 18 August 2008 to AGR Matthey’s customers:
“The Board of AGR Matthey has taken the decision to exit the jewellery business. AGR Matthey will no longer manufacture jewellery products in Australia or New Zealand. … The industrial business (medical and brazing alloys) will continue. … Arrangements are being made for fine gold grain (minimum order quantity 1 kilogram) to be made available through Perth to wholesale customers with delivery via Brinks premises on the eastern seaboard, provided there is sufficient demand. Larger secondary refining customers may be serviced through the refinery in WA.”
AGR Matthey refines around 10% of worldwide mine production and silver is a by product of that refining. It is not reliant on sourcing gold or silver from the general public. Australia is a net exporter of precious metals – in 2006/07 Australian mine production was 1674 tonnes with 431 tonnes of refined silver exported according to ABARE. Logically this means that there is enough silver to meet domestic demand.
Since the rest of your article with its “might have been” type speculations hinge on this error of fact about AGR Matthey, they are also incorrect and thus don’t warrant a response.
The Perth Mint’s unallocated facility is not the be all and end all of the organisation; the Mint sells bars, coins, numismatic products, unallocated storage, allocated storage, and an Australian Stock Exchange listed gold product – however customers want to buy their precious metal, the Mint strives to service it. Is the Mint perfect? No. But everyone who works there is passionate about precious metals and supporting the industry and is proud to work there. And so am I.
It is also probably important to be clear that I am bullish on gold and silver, although I take a long term view. If you sense I’m taking a bearish view that may be because I am a contrarian personality type and thus have a tendency always to look at the other side of any dominant view (and challenge my own views), as I believe the truth usually lies between the extremes.
Jason writes: I also think its normal for there to be shortages of silver and gold when inflation is raging out of control, and when the markets are manipulated, but I suppose we don't agree on reasons like that.
The comments I’ve made don’t exclude inflation or manipulation as factors. It is unfortunate that many have no confidence in COMEX; thankfully Australia does not have any precious metal futures markets. All I’m looking to do is to contribute some additional things to consider that no one else in the “gold internet community” talks about. Some of these factors may be important to the shortage of (retail) silver, some not so. It is just extra information that I hope fills out the picture, as no one knows everything.
Jason writes: That's insane. Right downstairs, they often run out of 100 oz. bars, and reportedly have no 1000 oz. bars for sale.
I asked our Shop if they have 100 oz bars and they said they have them available, so instead of relying on Jason’s “reportedly”, all I can say is that if you want to buy silver, ring our Shop up and buy it. Once your money clears, they'll ship. At the end of the day, my words and Jason’s words don’t matter – actions speak louder than words. And the only action that matters is delivery. Period.
Jason writes: Besides, that's a lie. Wholesale quantities in silver are 1 silver futures contract of 5000 ounces, which is about 1/6th of a tonne, not 20 tonnes! Further, I note that Nigel did NOT say he would SELL 20 tonnes of silver. He only wants to "deal" in that, minimum. He probably needs to buy that much to pull his fat out of the fire, as I will explain below.
The definition of “deal” by Encarta Dictionary within Microsoft Word is “an agreement, arrangement, or transaction, usually one that benefits all the parties involved”. This includes BOTH buying and selling. But to be clear, Nigel will SELL physical 1000 oz silver bars. Also, what I said was "he will do deals for a minimum". I did not say that "the wholesale market only deals in this minimum", you read that into my statement. That is just his minimum. He is the Treasurer for the whole Mint, not a retail bullion dealer; this is the deal size he operates at. Of course trading occurs in the wholesale market for quantities lesser than that. My point was that bulk quantities of silver are available in the over the counter (OTC) spot market. They are, and Nigel will supply them. Period.
Jason writes: AGR Matthey closed their silver operations!
Incorrect. AGR Matthey have not closed their “silver operations”. I quote from a letter dated 18 August 2008 to AGR Matthey’s customers:
“The Board of AGR Matthey has taken the decision to exit the jewellery business. AGR Matthey will no longer manufacture jewellery products in Australia or New Zealand. … The industrial business (medical and brazing alloys) will continue. … Arrangements are being made for fine gold grain (minimum order quantity 1 kilogram) to be made available through Perth to wholesale customers with delivery via Brinks premises on the eastern seaboard, provided there is sufficient demand. Larger secondary refining customers may be serviced through the refinery in WA.”
AGR Matthey refines around 10% of worldwide mine production and silver is a by product of that refining. It is not reliant on sourcing gold or silver from the general public. Australia is a net exporter of precious metals – in 2006/07 Australian mine production was 1674 tonnes with 431 tonnes of refined silver exported according to ABARE. Logically this means that there is enough silver to meet domestic demand.
Since the rest of your article with its “might have been” type speculations hinge on this error of fact about AGR Matthey, they are also incorrect and thus don’t warrant a response.
The Perth Mint’s unallocated facility is not the be all and end all of the organisation; the Mint sells bars, coins, numismatic products, unallocated storage, allocated storage, and an Australian Stock Exchange listed gold product – however customers want to buy their precious metal, the Mint strives to service it. Is the Mint perfect? No. But everyone who works there is passionate about precious metals and supporting the industry and is proud to work there. And so am I.
Jason Hommel Reply
Jason Hommel has made some comments to my blog of 31 August that I think are important. His questions/statements are in italics and my replies below.
Yes, but where do you sit? Where are those 1000 oz. bars that kitco and perth can't seem to be able to find for customers who want them? Why do Perth/Kitco have a shortage of 1000 oz. silver bars?
It may not be clear from my blog that I work at the Perth Mint. I have updated my profile to include my LinkedIn profile and “About This Blog” link to be clear in what capacity I do this blog. I have also included a picture of my favourite new coin, it is a Good Fortune coin.
When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis.
Depository have 1000 oz and 100 oz silver bars in stock for their clients to convert to allocate or collect. If you are a Depository client you have their contact details.
I also walked downstairs and spoke to the manager of our retail shop and they sell 100 oz bars for silver value + $74 per bar. They don’t really deal in 1000 oz bars because they are odd weight which doesn’t work well with their retail computer system and they are bulky, but I assume that most would rather 100 oz than 1000 oz anyway. Call Cathy or Liselle on (08) 9421 7428.
(Aside: while you may define collusion as something illegal, others may define it as anything that is against free market principles.)
The definition I used came from an online dictionary. See http://en.wikipedia.org/wiki/Collusion for another definition. The key elements are “secretive” and “fraud”. It does not mean “against free market principles”.
I would like to trade bullion in a free market manner, but it seems most everyone else want to "lock in" a guarantee of some sort or another.
I think it is entirely in keeping with free market principles that person A and person B have the freedom to enter into any agreement they see fit that does not hurt anyone else’s rights. There is nothing stopping person R (for retail buyer) from offering a higher price to A to secure supply of A’s silver. Anyway, even if A has committed to supply silver to B, there is nothing stopping B from selling that so acquired silver to R via auction or at a higher price.
The agreement between A and B may restrict A from supplying to R (which was all I was trying to explain) but not B from supplying to R. I therefore do not see any fraud being perpetrated against R or any restriction of the free market. In the end, the silver ends up in someone’s hands and they are free to auction it off to the highest bidder as you have recommended.
It's been my experience that people in the industry, the coin dealers, over-value their own direct personal experience, and have trouble seeing the big picture. They see the public selling silver to them, and thus, from their view, there is a "glut" … where public buying increased ten fold, and they've been turning away customers, and trying to buy from refineries, instead of sell to them, in all of 2008.There is an expression used to describe such a viewpoint. They can't see the forest because the trees are in their way.
I suppose I agree with you, but not sure this is a problem. The coin dealers operate at the end of the precious metal industry value chain so deal in “trees”, that is their business. You are exactly right, they either see net buying or net selling and either net buy or net sell from/to their source of product one step up in the value chain. This is good because it sends a signal about the volume of demand back to that source. I don’t know that they need to see the forest to do their job properly.
Yes, but where do you sit? Where are those 1000 oz. bars that kitco and perth can't seem to be able to find for customers who want them? Why do Perth/Kitco have a shortage of 1000 oz. silver bars?
It may not be clear from my blog that I work at the Perth Mint. I have updated my profile to include my LinkedIn profile and “About This Blog” link to be clear in what capacity I do this blog. I have also included a picture of my favourite new coin, it is a Good Fortune coin.
When I say that wholesale bars are available, it means in wholesale quantities. I cannot speak for Kitco, but I went upstairs and spoke to the Treasurer and he will do deals for a minimum of 20 tonnes of silver and 1 tonne of gold. Call Nigel Moffatt on (08) 9421 7403. Price will be on a deal-by-deal basis.
Depository have 1000 oz and 100 oz silver bars in stock for their clients to convert to allocate or collect. If you are a Depository client you have their contact details.
I also walked downstairs and spoke to the manager of our retail shop and they sell 100 oz bars for silver value + $74 per bar. They don’t really deal in 1000 oz bars because they are odd weight which doesn’t work well with their retail computer system and they are bulky, but I assume that most would rather 100 oz than 1000 oz anyway. Call Cathy or Liselle on (08) 9421 7428.
(Aside: while you may define collusion as something illegal, others may define it as anything that is against free market principles.)
The definition I used came from an online dictionary. See http://en.wikipedia.org/wiki/Collusion for another definition. The key elements are “secretive” and “fraud”. It does not mean “against free market principles”.
I would like to trade bullion in a free market manner, but it seems most everyone else want to "lock in" a guarantee of some sort or another.
I think it is entirely in keeping with free market principles that person A and person B have the freedom to enter into any agreement they see fit that does not hurt anyone else’s rights. There is nothing stopping person R (for retail buyer) from offering a higher price to A to secure supply of A’s silver. Anyway, even if A has committed to supply silver to B, there is nothing stopping B from selling that so acquired silver to R via auction or at a higher price.
The agreement between A and B may restrict A from supplying to R (which was all I was trying to explain) but not B from supplying to R. I therefore do not see any fraud being perpetrated against R or any restriction of the free market. In the end, the silver ends up in someone’s hands and they are free to auction it off to the highest bidder as you have recommended.
It's been my experience that people in the industry, the coin dealers, over-value their own direct personal experience, and have trouble seeing the big picture. They see the public selling silver to them, and thus, from their view, there is a "glut" … where public buying increased ten fold, and they've been turning away customers, and trying to buy from refineries, instead of sell to them, in all of 2008.There is an expression used to describe such a viewpoint. They can't see the forest because the trees are in their way.
I suppose I agree with you, but not sure this is a problem. The coin dealers operate at the end of the precious metal industry value chain so deal in “trees”, that is their business. You are exactly right, they either see net buying or net selling and either net buy or net sell from/to their source of product one step up in the value chain. This is good because it sends a signal about the volume of demand back to that source. I don’t know that they need to see the forest to do their job properly.
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