Deflation, The Banking Crisis And Why Gold Will Rebound

For years now I have been listening to the inflation/deflation debate and unlike many of the gold dealers, I have been in the deflationary camp as I wrote about in my book Buy Gold and Silver Safely. The following articles can all be found at the Buy Gold and Silver Safely website. They detail my views as to why I differ than most advisors based on my own research. How is it that I can see things differently? Perhaps it is because if you asked your advisor or gold dealer what the word “deflation” means, they probably can’t even answer the question. It’s easy to talk about inflation, and inflation will rear it’s ugly head, but right now it is deflation that Bernanke is worried about and despite all of the Fed’s efforts, they are failing at stopping this deflationary credit contraction.

What Does the Price of Gold Do In Deflation?   8/20/2010

Bernanke Worried About Deflation As His QE2 Rhetoric Continues – 10/19/2010

How A Deflationary Credit Contraction Will Unfold 11/18/2010

Dollar vs. Gold In A Dual Inflation-Deflation Economy   3/4/2011

2012 Predictions For Gold, Silver, Stock Market, Economy and Elections 1/11/2012

Why Is Bernanke Doing All He Can To Prevent Deflation?

Deflation is good. It weeds out the bad and allows the economy to rebound from the debt destruction. But Bernanke has said all along that the Fed will do all they can to prevent deflation. But the Fed’s dual mandates of stable prices and maximum employment seem to interfere with Bernanke’s thinking. The result of deflation brings about lower prices. How is this a bad thing for anyone? Doesn’t adding more debt to the treasury result in inflation by definition? If so, then why are we still deflating? The answer is most don’t define deflation by adding the “credit” incurred in the system. This credit has to be contracted for the excesses to be corrected. All Bernanke is doing with bouts of Quantitative Easing is adding to the problem. While it can have temporary effects that can benefit certain sectors of the economy where the money flows (like banks), it is only to keep the game going for those industries. The rest of us contract. Individuals and businesses contract and pay off debt or go bankrupt. The majority of the economy sinks into the deflationary black hole.

I do realize that most of what I said in the last paragraph can be difficult to understand, which is why I dedicated an entire chapter of my book, Buy Gold and Silver Safely to it. Chapter 4 has 100 footnotes explaining in detail what has occurred, what is occurring in the economy and what will happen next. But it’s not as much this inflation/deflation debate that is going to dictate our future. It is however, our banking system.

The European Crisis

We have recently received a taste of what can occur when an economy is in dire straits. We can look to Europe with Greece, Spain and Italy (and more to come).

European Bank Stress Test Results Prediction 7/21/2010

Failed European Bank Stress Tests Offer Even More Reasons To Own Physical Gold and Silver  3/25/2011

Euro Fall and Dollar Rise Will Put Pressure On Gold and Silver Prices 11/14/2011

It is clear to me that the media doesn’t understand a thing about what is happening in Europe, let alone here in the U.S. They have failed miserably while being cheerleaders for the stock market. They don’t allow those who have negative views much time on their shows. They mock those they do let on. I am speaking primarily about those on CNBC. If you look to CNBC for your investing ideas, you can bet it will never be gold or silver recommendations. There is no place for gold or silver in a portfolio as far as they are concerned. But they, along with all other financial media, miss one important issue; the banks.

In the articles above I lay out why I thought the European Banks would pass the stress test, but they didn’t pass my analysis of their financials. Anyone who can read a 10k report and compare past performance to present could see the European banks were in trouble. I hate to use a cliche, but this isn’t rocket science folks. My Business Law professor taught me about reading financials in college many moons ago. Analyzing certain ratios can tell you the shape any company or in this case bank is in. That’s why on my site I have written so much about the nations top banks and their involvement in sub-investment grade derivatives. This is not the same thing that Zero-Hedge writes about, the type of interest rate derivatives that are utilized daily, but rather the derivatives that are sitting there with no real counterparty to them because no one wants them. Look at just what happened to J.P. Morgan Chase and their $9 billion “mistake” for a sign of what’s to come. This was blamed on some “whale” trader. Believe what you want. J.P. Morgan Chase is the leader of all the nations top banks when it comes to holding the most sub-investment grade derivatives.

Worthless Dodd/Frank Financial Reform

There was nothing in the Dodd/Frank Financial Reform Act to curtail the banks from this type of trading and in fact, these top banks have more sub-investment grade derivatives on the books than at the height of the 2008 financial crisis. Where again did most of the TARP money go? To the banks.

Where will future bailout money go? To the banks. Unless you finally say enough!

In the meantime, gold is feeling the pressure from a stronger dollar as I eluded to in my 2012 predictions. Here is what I said;

The dollar index is now past 81 and moving towards the 88,89 level while the Euro moves down to its lows of around 117,118.

I do see these levels reached in 2012.

Politics and Obama/Romney Ramifications -What’s Next for Gold?

While we are seeing stronger Treasuries for now, this pattern won’t last. I think that after the election we will see the beginning of the end. I believe we will see Obama win the election because he still has the QE3 wildcard he can play with Bernanke and he just got his national health care approved by an idiotic Supreme Court, guaranteeing the government will increase the price of everything health related in the future and causing all the citizens to pay higher taxes. It’s FDR and LBJ all over again. But the best thing that can happen to the Republican Party is Obama winning another term because this economy will be driven into the ground. It would be driven into the ground with a Romney adminisitration too, but that would just bring 4 or 8 more years of the Democrats thinking more government is the solution. Until the Republicans return to the Party of Peace and limited government, they won’t win another election. With Romney in charge, we’ll get WWIII to try to stimulate. My next book, We the Serfs, is about preempting any future debt and wars that both of these parties bring to us citizens and to stop this monetary and political madness they are implementing.

In the meantime, as I wrote in Sept. 2011, Only Precious Metals Can Prepare You For The Banking Crisis. Dollar cost averaging into a position is the best medicine for the Left and Right madness that comes. These prices over the next few months will be the best you will ever see. I have noticed lately that my average sale size is getting larger. Big money is coming into gold and silver at these reduced prices. Smart money is coming in. Smart money will also wait till we break to new highs, because that’s just human nature. Many can’t think outside the box or do simple math. But anyone in gold and silver at prices under $2,500 an once and $50 respectively, will be happy they did so 5 and 10 years from now. Those who buy over the next few months will just have a head start. Deflation may be here, but it is the banking crisis that will strike fast and hard. The motto of the Boy Scouts comes to mind; “Be Prepared.”






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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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