Over the Top on Black Friday

[The Machine]

 

 

Gold has gone on sale this Black Friday, that new US import to boost consumption and fight deflation...

 

FOUR HUNDRED years after the first Thanksgiving feast, writes Adrian Ash at BullionVault in London, the Pilgrims' descendants have sent back to England a gift called Black Friday.

 

Thank you, America. Really, you shouldn't have. 

 

While British shoppers are new to this "tradition", today's orgy of shopping does in fact celebrate the Pilgrims' love of thrift and hard work. 

 

Sales staff must work hard...even calling the police to fight off the mob...as shoppers work flat out to snap up the best bargain deals. And in pursuing their own self-interest, everyone is working for the good of the community. Or at least, a very global, very 21st century version of it.

 

Because consumers must keep consuming...dumping stuf into landfill as they "upgrade" their baubles...or the whole world risks tipping into depression. 

 

This battle looked lost back in 2008-2009. Many analysts think the war will be lost in the end anyway. Deflation is our future, says the debt mountain which has only grown worse since the financial crisis. So does the world's ageing population, according to forecasters such as Harry Dent.

 

Old people spend less and save more. And with the "baby boom echo" now reaching its 40s, lower consumption will over the coming decades turn us all into Japan...epicentre of the global deflationary slump. 

 

Plunging oil prices, for instance, aren't just the result of a glut in supply. Demand growth is weak, warning of a deeper depression in the global economy, led perhaps by China's long overdue credit bubble now leaking air.

 

The world's second-largest economy...now home to its second largest stockmarket by value...has home-grown deflationist worry-warts too. Two state-employed economists said this week that $6.8 trillion invested over the last 5 years is now worth zero, "wasted" on over-capacity. They over-state the case, perhaps. But a lot of concrete poured in China since 2009's huge stimulus package will sprout weeds long before it finds real use. Just look at Japan.

 

In deflation, of course, the value of money actually rises, rewarding cash savers and hurting all debtors (and then their creditors when they go bust) as the price of everything falls.

 

So what would such a gloomy outlook mean for gold and silver?

 

If deflation stages a quick victory, it will take no prisoners. Look to 2008 for an example. Silver, being an industrial metal, sank along with stock markets, corporate bonds, real estate and all other commodities. But gold found its floor much sooner, and rose quickly, as demand surged for that credit-free store of value. 

 

A long, soft deflation in contrast would likely be bad for both gold and silver, or so most analysts think. Cash and most of all the US Dollar will reign supreme. Not paying a rate of interest, precious metals will get crushed by a rising...and positive...real rate of interest on bank deposits after you account for that negative rate of inflation.

 

Well, maybe. But long-term "secular stagnation" will not be given the field anyway. Because like the marketing teams at Amazon, Wal-Mart, M&S and all the rest, central banks are doing their best to push us consumer troops "over the top" once more. 

 

Zero rates and QE money printing aim to force you out of the trenches, over the top to fight against deflation by not saving but borrowing instead. The fact they haven't worked to reverse the underlying drop in consumer-price inflation so far doesn't seem to matter. 

 

But "at some stage, if monetary policy doesn't work, we get something else," says long-time deflation forecaster Russell Napier in this interview with MoneyWeek magazine. 

 

"That's going to be government activism of some form." And that, says Napier...and even though he thinks deflation is bad for gold prices...means that "even in the world of deflation, it's likely the gold price would go up." 

 

Well, maybe again. But gold prices could get "something else" from governments or central banks much sooner. The European Central Bank has started talking about buying gold as part of its QE money printing plans. And in a world of deflation, where savers flourish at first but debtors then struggle, the savers may find a lump or rare, indestructible metal used to store wealth for 5,000 years starts to appeal.

 

Physical gold, unlike a bank deposit account or fixed-income bond, cannot go bust. A long, soft deflation which central bankers fail to hold back will quickly over-run savers as a deflationary crash. Gold will then look a useful weapon for savers wanting to save rather than suffer default.

 

For Black Friday 2014, meantime, gold has now gone on sale, discounted 3% in Dollar terms from last week's price and now 35% below its peak of 2011.