October 27, 2008

Deflation Is Not The Problem: We Face Inflation And Currency Collapse

By Julian Dunraven, J.D., M.P.A.

Honorable friends,

The value of the dollar is up, gold is down, and so is oil; stock values have plummeted, and everywhere I hear fretting about deflation. Do not be deceived. It is not deflation, but inflation which has come to plague us. If people fail to understand this point and rely on the dollar, their wealth will be wiped out.

The credit crisis has forced a massive deleveraging process faster than anyone anticipated. As a result, entities are selling anything they can for dollars to pay down debts. This sell off includes gold holdings, which is helping to push the already manipulated prices down further. The deleveraging sales (along with naked short selling) have also crashed stock prices. This has caused speculators to fear deflation rather than inflation and seek dollars rather than assets, and so they have sold off oil, causing a drop in the price. Coupled with the recessionary fears, this has cut demand slightly and OPEC is cutting production. Keep watching. All of this is temporary.

Demand for oil is still growing, even if that growth has slowed somewhat. Even with demand expected down at 86 million barrels per day, that is still more than last year and less than we are expecting for next year. China alone still has an 8% growth rate. We still suffer a supply destruction of 5-8% per year and have no prospects of any major new fields. The value of oil will climb, and it will climb high.

As for our stocks, many are not overleveraged and are quite strong. They should recover nicely from the dumping this liquidation is forcing right now. They will also benefit as Sen. Charles Grassley (R-IA) has ordered the Justice Department to begin an investigation of the SEC. As a result, the SEC is starting to take action against naked short sellers who have been stealing trillions by selling non-existent stock on the markets. One investment advisor has reported to me that up to 50% of the stock of several major companies currently being traded simply does not exist. Congress is finally beginning to notice this and take aim at these criminal traders who have defrauded both the companies they trade and the investing public in what may be the biggest financial crime we have ever seen. Thus, certain sectors of our economy are still very strong, and with prices so low, it is a good opportunity to buy.

Be very clear about this point: inflation or deflation is determined by increasing or decreasing the money supply; they are not determined by rising or falling prices alone. We are not in deflation simply because of a few momentarily low prices. The Fed is the real worry. It has just added over $5 trillion to its balance sheet. Yes: $5 trillion. We have borrowing and inflation when we should have savings and capital. Our money supply is inflating as if there is no tomorrow. Such a thing has never before been seen in this country. We did see it in the Weimar Republic of Germany, in Argentina, and in the French Revolution, though. In each case, the government inflated the currency to the point of collapse. When the people began to starve, the French Queen was foolish enough to say “Let them eat cake.” She lost her head for it.

When the Fed manages to inject this cash into the market, we will begin to enter hyperinflation. Inflation will far surpass the interest rates for cash and bonds and any savings connected to the dollar will be wiped out. This is why we have seen savvy investors like Warren Buffett move all of their money into the equity of stocks, or into the safety of real money: gold and silver.

This is still a wonderful time for the purchase of gold and silver. The spot prices on COMEX have yet to realize the shortages we are facing. Yet, every dealer I talk to is desperately adding staff to try and keep up with the unprecedented demand. People are now waiting more than twenty minutes just to place an order and then being told they will have to wait anywhere from 3-5 months for delivery. Faced with such shortages, I have seen the price of a 1 oz. gold coin on eBay rise to over $1,500 while the spot price on COMEX lingers at $700 per ounce.

This will not continue. COMEX prices would lead you to believe there is a glut in supply. Yet it is becoming difficult to get gold and silver. It will shortly be even more difficult to get silver as it is a byproduct of lead and zinc mining and those metals are selling below cost, so mines are shutting down. People are beginning to realize that COMEX does not have physical metal to back up its paper contracts and they are demanding delivery. Many investment strategists expect COMEX to default by December. Once that happens, the dollar really does collapse as the price of gold may climb up to $5,000/oz., and silver may shoot to over $100/oz.. At that point, people will either have gold, silver, and stocks, or they will have worthless paper. We are facing inflation, and that is the simple fate awaiting our fiat currency system.

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