Is Fear of Deflation Sapping Gold and Silver?


There’s no point in pretending it’s those sleazy, child-molesting bullion bankers at Morgan Stanley, Goldman Sachs and  J.P. Morgan who have been pounding on mining stocks and bullion futures in the last few months.  Lately, it has felt like the whole world has been dumping them.  For the record, we are ourselves cautious buyers of bullion futures and select mining stocks at these levels, since many popular trading and investment vehicles that we track are closing on important Hidden Pivot correction targets. (Want to find out the exact prices at which were are doing the buying? Click here for a free trial subscription to Rick’s Picks, including real-time guidance and a 24/7 chat room where the discussion never stops.)

When bottom-fishing in markets that have been falling as steeply as gold and silver have been falling, we recall the advice of our friend, the late Malcolm Watts: “When attempting to catch a falling piano,” Malcolm, a PSE option trader and gifted technician, used to say, “wait until it has bounced three times.” (It was not a falling piano that felled our friend when he was in his thirties, by the way, but the stresses of the market on an apparently defective heart.)  So, have bullion futures bounced the required three times yet? By our count, there have been more like four bounces since February. And although that may not mean it’s perfectly safe to buy the precious-metals complex at current levels, it does imply that those who waited are happy they did.

By and large, however, precious-metal bulls are probably feeling shell-shocked by now, since many of the stocks that they hold dear  – quality companies like Silver Wheaton, Newmont and Yamana – have been sold nearly to death.  The shares of these firms and many others looked like great bargains when the were trading 35-40% higher, so just imagine what kind of bargains they are now. Even so, we’ve always preferred to do our own buying at promising levels, but with tight stops each step of the way, rather than by averaging down.  Using the latter strategy, it’s hard to imagine that any gold bug would still be solvent. The saying “keep your powder dry” may not even apply to bullion bulls, since gold and silver are their dry powder.

Europe, then the U.S.

So what is weighing on bullion, if not the nefarious designs of the bullion bankers? It’s possible that the deflationary implosion of Europe may be a factor — and perhaps the prospect of one even worse in the U.S.  The hyperinflationists talk about QE3 and a torrent of new money flooding into the markets to save the day. That would be extremely bullish for gold and silver, for sure. But in point of fact, the massive monetization has yet to come. Moreover, there are reasons to think that even if it were attempted, it would crash the markets before the presumptive trillions in new credit-money could find its way into the banking system. This is the deflationary scenario we have written about before: a banking collapse that occurs so swiftly that the effects of QE3 are negated by skyrocketing yields for private debt. Peter Schiff says the central banks will start monetizing all institutional debt at that point, triggering a hyperinflation. But what if not? It seems plausible the banks would then shut down and the economy would plunge instantly into deflation.

Is that why gold and silver have been taking such a beating lately?  We’ll concede that a hyperinflation lies somewhere down the road, since sovereign debt will have to be retired in some fashion. But perhaps bullion is telling us that, more immediately, the central banks lack the guts to go all-out in their effort to hold deflation at bay. Either that, or investors think it may no longer be possible to do so.

  • Robert May 16, 2012, 8:22 am

    I swear I don’t know why all of you continue this incessant debating…

    One Quadrillion dollars in global notional derivative debt. It already exists. It is already in place.

    One Quadrillion dollars that HAVE to be created in order to “pay back” this debt.

    Deflation… c’mon.

    • bc May 16, 2012, 8:58 pm

      They don’t HAVE to pay these debts. They can go bankrupt, just like they did in the 1930’s. Bankers jumping out windows on Wall street was a symptom of deflation. This can and (I believe), will happen again. As I recall, stocks and bonds fell like stones the last time. Why is everyone so cock sure the govt. will print $trillions by the hundreds? They didn’t last time. They aren’t now, certainly not yet.

  • bc May 16, 2012, 5:39 am

    Take JPM Chase as an example. 180 billion market cap and 3.6 $trillion on their balance sheet. How much does their balance sheet have to deteriorate to wipe out shareholders equity? About 4% will do it. As Vlad (the impaler) notes, this may already have happened. Mark to market is still suspended. Regulators keep forgetting to reinstate it. I think Chase got their tit in a wringer trying to hedge against looming liabilities from WaMu. Yes, Jamie lied to us about corporate paper CDS snafus, sending the hedge fund hounds barking after the wrong rabbit.

  • gary leibowitz May 15, 2012, 11:35 pm

    All the same arguments yet the market and earnings keep going up? How can that be? If you expect the market to start on a long bear march now there has to be some disconnect between what has happened over the last 4 years and now. Is there? Spending, borrowing, inflation pressures all point to a better market. The debt is there and has been there.

    What is the catalyst to reverse this bull trend?

    • bc May 15, 2012, 11:42 pm

      Oh that’s easy, the collapse of the finance sector. Banks are capital impaired. If the money printing fails to keep accelerating (forget stopping) it’s kaboom for the banks. I thought this was common knowledge.

    • gary leibowitz May 16, 2012, 1:17 am

      Banks are not capitalized? The money that the banks received from Uncle Ben are for the most part still there. Some 88 percent of all money given to the banks are still in their reserve, collecting interest at that.

      I believe the problem is just the opposite. They have once again embarked on derivitive plays. Chase was chastised for losing 2 billion in a week.

  • Cam Fitzgerald May 15, 2012, 10:45 pm

    Major resistance has now arrived for both Gold and Silver. Will it hold? Or will one more nasty drop suck the last of the blood out of the metal die hards this week. I will sit on the sidelines and watch with curiosity as this game of chicken plays out. The dollar is headed for .82 with a near certainty while the Euro stumbles to its own near bottom at 1.26

    Perhaps the stars are aligning and if so then Thurday could well shape up to be spectacular as precious metals bolt out of the gate and the Euro/USD see a firm reversal off the current direction.

    Or will this be a head-fake to draw in the technical pundits and drain their bets of blood one last time before the real action starts? I am setting my clock…..plan to get up early for the fireworks.

    Like I said last week….shake the tree hard enough and all the nuts fall out. Maybe only I am amused by that expression though!

    • Cam Fitzgerald May 15, 2012, 11:03 pm

      PS: I think the Euro is really heading for 1.20

      But that is just negative thinking, right?

  • Stewie Griffin May 15, 2012, 10:30 pm

    Rick, sounds like it is time for you to re-visit FOFOA again.

  • bc May 15, 2012, 10:20 pm

    If inflation is always and everywhere a monetary (policy) phenomenon, it is fair to say that hyperinflation is always and everywhere a fiscal (policy) event. Combine this with the simple math of how much printing is required to dilute the currency enough to fully solve our debt overhang problems (many hundreds or thousands of $trillions) it’s pretty gob-smacking from a reality check standpoint. I continue to believe that debt-deflation is in our future, and that politics will deal with same by lubricating and acknowledging the usual mechanisms of debt repudiation; bankruptcy, sovereign debt defaults, and plain old monetary inflation including central banks wrecking their own balance sheets, but not including fiscal insanity with concomitant hyper money printing. It’s a close call though I must admit.

  • Robert May 15, 2012, 7:58 pm

    Deflation would be GREAT…

    Gasoline had ratcheted up to nearly 20% of my non-discretionary spending per month; and that was sucking big time.

    Porter Stansberry says $40 oil is coming our way… Oh baby – don’t tease me.

    • Seawolf May 15, 2012, 9:54 pm

      Here is Marin Katusa’s replay to Porter Stansberry. I’ll go with Marin on this.

    • Cam Fitzgerald May 16, 2012, 2:58 am

      Don’t talk like a fool, Robert. Deflation is a damned disaster and you know it. We must do everything in our power to have even marginal economic growth and you should support those efforts. Have you never heard of the spiral of falling prices and wages?

      Do you have any idea how quickly it might happen?

      Not likely

    • Robert May 16, 2012, 8:18 am

      “We must do everything in our power to have even marginal economic growth and you should support those efforts. ”

      Ok Cam – I’m with you- guess I better run out and buy some Berkshire and some AAPL, and some GOOG…. Maybe a little JPM thrown in for good measure.

      Actually- I am doing my part- I have active equity partnership in 3 private companies that actually make and sell real things, and are doing so without the need for bank debt.

      “Have you never heard of the spiral of falling prices and wages?”


      “Do you have any idea how quickly it might happen?”

      No, and neither do you.

      But, let’s use Iceland as an example – it seemed to happen pretty bloody quickly, and then they ran the bankers out of Dodge, and the productive got back to work.

      Seriously- what is it like to wake up every morning trembling with fear that “today might be the day”…?

      What is it about truth and reality that scares you?

      I simply don’t fear any global economic scenario that you (or Tim Geithner) can possibly present me with.

  • Mark Uzick May 15, 2012, 5:35 pm

    There cannot be a deflationary depression without austerity; if federal spending continues to be higher than revenues, that would imply continued money printing; inflows of safe-haven money are not going to last indefinitely. Foreigners already provide us with products for our worthless paper; to expect them to return that worthless paper in exchange for IOU’s, in effect, loaning us back the worthless paper we just spent so we can get more products with the same worthless paper is not sustainable enough model to continue for very long.

    As Rick suggested, further quantitative easing may crash the markets; but I would suggest that it may also crash the purchasing power of the FRN as a fed that’s hell bent on money printing will either prop up banks with liquidity or, alternatively, let them become insolvent; the President declares a national emergency; and the banks are nationalized – the national bank and the fed becoming one agency; the markets surge higher in nominal terms and we have an inflationary depression – stagflation on steroids and the end of life for many Americans and many of the foreigners who we designate as scapegoats.

    If we institute austerity, then there will be that deflationary crash that’s got everyone here so bothered. If we have austerity combined with continued high taxes and regulatory economic strangulation, life will be very difficult but then it will get even worse – so bad that mere survival will be iffy.

    The best scenario is a very happy one: austerity combined with tax cuts and deregulation bringing us swiftly into a short lived deflationary depression and the rebirth of a nation that’s freer and more prosperous than our ancestors ever dreamed was possible.

    • Avocado May 15, 2012, 10:52 pm

      “Foreigners already provide us with products for our worthless paper; to expect them to return that worthless paper in exchange for IOU’s, in effect, loaning us back the worthless paper we just spent so we can get more products with the same worthless paper is not sustainable enough model to continue for very long. ”

      So what happens if China stops buying our worthless paper? That might mean that we stop buying products from China. What does that do to China? Do you really think they can substitute some other healthier country or themselves for the trade they have with us?


    • Mark Uzick May 16, 2012, 12:07 am

      So what happens if China stops buying our worthless paper? That might mean that we stop buying products from China. What does that do to China? Do you really think they can substitute some other healthier country or themselves for the trade they have with us?

      If they loan us back our own worthless paper for promises to pay the same worthless paper with hardly any interest (What does that do to China?), then the Communist party is run by morons.

      I suspect they are quietly divesting themselves of this paper – either spending it outright or sneakily using it as collateral pledged against the purchase of real resources and resource producing assets including gold and gold miners in order to keep up the pretense of supporting the FRN while unloading them on bag holders.

    • Cam Fitzgerald May 16, 2012, 2:54 am

      China and America are on the same page here, Mark. Stop dividing us by culture, country or race. I cannot understand the obsession so many writers like you have with the “will China stop buying Treasuries or not” theory. None of it makes any damn sense. Can you not see we are all in this together……that we are all rowing like a team to support our collective economies?

  • mario cavolo May 15, 2012, 4:39 pm

    Rick ” This is the deflationary scenario we have written about before: a banking collapse that occurs so swiftly that the effects of QE3 are negated by skyrocketing yields for private debt.”

    I want to clarify terms and definitions on points; inflation is a gradual rising of prices, while deflation is a gradual falling, while recession/depression is a much worse falling.

    “…a banking collapse that occurs so swiftly that….” etc. is none of the above. That would be a called a disaster event or a meltdown event or collapse event, in the true sense of those words, a fast deflationary collapse, not a price/economic trend happening to the production and consumption of the economy…

    Conversely hyperinflation is a monetary EVENT due to a govt policy decision usually involving a currency revaluation or announcing a default or calling in bonds or whatever by a govt body.

    I think I’m clear above…? Cheers, Mario

  • mario cavolo May 15, 2012, 4:30 pm

    We’re in trouble gang. The “known” realistic optimist gang here, including myself, are now decidedly in unisom comfortably knowing that this is only another consolidation and that being a doomsayer is really wrong. Uhoh…haha…hmm…load up on puts 🙂

    • Robert May 15, 2012, 7:56 pm

      I know… selling puts is a screaming money maker… ESPECIALLY in the miners.

      I have short sold puts that are raking up huge gains
      while NOBODY is exercising… I will GLADLY take the shares but no one seems to want to dump them on me.

      Probably because the big banks are re-hypothecating and re-short-selling the same shares 100 times on 100 different exchanges… I’m sure that will end well.

      This tells me only one thing – the prices are throughly under control of technical shorts, and are being aided and abetted by the hedge and mutual funds bailing out due to redemption requests, and forced redemptions by so many companies going below a buck.

      it is indeed 2008 all over again, and just like 2008, the more painful it gets, the more I am buying.

      I am my own best contrarian indicator – the pain of looking at the red ink is the power of understanding the entire premise of “buy low”, and “buy more lower” and “buy even more lower”…

      Drive them all below their cash in the bank. Drive them to the point that their ounces in ground are priced at 0.00 NPV…

      PLEASE keep selling. I will take the other side of the trade in solid companies until I am bankrupt (which is also a no-brainer, because bankruptcy in America means free food stamp voucher cards, free cable TV, and no more house payments)…

      How can I lose?

    • Mark Uzick May 15, 2012, 9:40 pm

      Robert, am I getting this right? you’ve been selling puts on mining shares that have expired deep in the money unassigned? It’s almost impossible to believe;
      free money!!!!

    • Cam Fitzgerald May 15, 2012, 10:49 pm
    • Robert May 16, 2012, 8:07 am

      Yes Mark- you read that right… free money.

      One only need look at the option chains in Exeter (XRA) Great Panther (GPL) and Almaden (AAU).

      I sold April put options in each that expired well into the money, and not a single share was assigned.

      Right now I’m thinking about selling the XRA November 5.0 put

  • Alvaro de Orleans-B. May 15, 2012, 3:48 pm

    I may be sort of a simpleton, but there are some current views that escape my modest understanding. In no particular order:

    1. Why all the fuss about Greece and the Euro?
    Granted, Greece cannot service its sovereign debt — that’s bad for the lenders, who already suffered a major default, but where’s the “hard” link to to “Greece leaving the Euro”?
    If the State of California goes bankrupt it’s a major upheaval, but would it imply California abandoning the dollar?
    In Greece, as in California, there are many other non-State economic actors, most of them solvent — why should they too abandon their currency? It escapes me.

    2. Gold is “tanking”?
    As today, it was around 1550 Last July — and also 1400 or so that same month, 10 months ago.
    Maybe the 10 year 15+% compounded price raise is now “tanking” — that might be a good thing: gold was, is and will ever remain an important part of the monetary scene — behaving like a bubble tech stock was the really unsettling aspect for many long term investors.

    3. All central bankers are crooks, stupid or (unlikely) both?
    Methinks some of them may be so, but most are carefully selected, try to do a decent job in currently quite difficult conditions and are subject to monetarily incompetent politicians.
    Maybe some bankers are banksters, but also some traders are traitors, some investors are inventors and some newsletter writers are [you fill this one]

    4. A horrible crisis is approaching?
    My parents sometimes told me how, during WW2 in Europe, sometimes catching a big rat became part of the dinner.
    I assume that’s “being in a crisis”, but I believe we are far from such a scenario.

    In my humble opinion it pays to assume we are in a solid downturn, that it will eventually end, that meanwhile the world goes on with many opportunities, that the Chinese may become far stronger — or not — and that excessive hand-wringing tends to keep us away from productive activities.

    • Robert May 15, 2012, 8:11 pm

      Mu opinion/viewpoints on each of your questions:

      1) Nobody cares about Greece- people only care about Greece’s liabilities which they are counterparty too (remember, Greece would not have so much debt without so many generous, altruistic souls out there extending them cheap “credit” through the years). No good deed goes unpunished.

      2) I have nothing to add- I think you nailed it with Gold. There are only three smart actions with Gold- Buy it, Hold it, or or just stay the hell away from it completely; but only a moron would be selling, and an even bigger moron would be shorting.

      3) Surpisingly- I kind of agree with you- I don’t think Bernanke is willingly evil – I do, however, think he is a victim of his own over-inflated ego in thinking that Economics was a quantifiable science with any form of valid laws. Economics hinges on psychology, and psychology is the art of believing that people will behave the way you expect them too given specific circumstances. The Emereror’s New Clothes demonstrates that such beliefs are only valid until they aren’t…

      4) Crisis is the tool Oligarchs use to convince you that you need their “help”. If you do not need help, then you are not in crisis, right?

      Once you thoroughly own your own life, you begin to see that there are very few other people like you out there.

  • gary leibowitz May 15, 2012, 2:51 pm

    With such a huge run it is not so hard to imagine a consolidation period. It is also true that both equities and gold have enjoyed a symbiotic relationship. I believe both will emerge for another run up.

    It looks like the EU has flinched with Greece. It also looks like QE3 will not be necessary. The spending and borrowing numbers make it almost impossible to venture into another quantitative easing. The drop in oil and other commodities bode well for a summer spending spree. It’s like having a huge huge tax break.

    The debt situation has been held at bay. The can has been kicked once again down the road.

    There is nothing in the recent slide that suggests anything other than consolidation.

    • John Jay May 15, 2012, 4:51 pm

      The price of crude peaked at 111.30 back on 3-1-12.
      Gasoline prices here in So. California are still at $4.49 for premium. Electric bills in parts of south Orange county have gone from $150 to $543 for a small 1200SF house. Water bills for some areas have tripled. And it is not just in CA. People in Jefferson county Alabama are using port a potties because they can’t afford the high monthly sewer fees.
      Health insurance premiums are always up. In spite of Ben’s 2% inflation fantasy, the things he doesn’t count have had such huge increases that the average person, especially retirees and those making a lot less than they did since 2008 are being squeezed like never before. An extra $500 a month for electricity, gasoline, and water is a big deal to most people.
      And I don’t see any deflation in those areas at all.
      Ben conveniently ignores this fact as he chants “inflation is contained”. There is already enough inflation present to be a real problem. Especially when ZIRP means a lot of people are spending their capital thanks to 1% CDs. Sub prime auto loans and 3% down FHA loans for houses mean that we will surely have an echo of the last big bust with more bad debt to deal with. As individuals we can always make money in the market, but the big picture is still grim, nothing has been done to stop the corruption. I see no evidence of deflation in anything I buy on a regular basis. Not food, not gasoline, not tires, not oil changes, not a bale of hay, not health insurance.
      None. Imaginary deflation is just another excuse for Ben’s ZIRP trap.

    • Cam Fitzgerald May 15, 2012, 10:59 pm

      Cripes, we are heading for a deflationary abyss, Gary. How can you be so optimistic in the face of what is taking place everywhere in unison? I can count more than a dozen housing bubbles outside the US that are all about to burst under the wrong circumstances or where the response is too weak. It is ominous as they are peaking or already in decline on every continent except Antarctica. We see them in Africa, the Americas, Europe, Asia and Australia. The implications for the future are really quite alarming and it is now abundantly clear that we will need a uhified global response to policy levels and Central banks to offset the hazard as it rapidly approaches. In my view, a stock market crash is now a virtual certainty.

  • Andy B May 15, 2012, 9:40 am

    All drama aside, this may just be one zig or zag in the risk-on and risk-off trade. The only ones feeling really apocalyptic are the mine lovers, deeply under-water from optimistic price plops higher up. The DOW lovers and bond lovers aren’t in fear and loathing yet, and can take some more hits before the money levers need to be pulled again. Meantime oil is down, so that’s all good for Dr. Pinocchio.

  • Benjamin May 15, 2012, 7:58 am

    But the 30 year down-trend in Treasury yields is still well intact. Deflation fears? Nah. It’s just the piggies crowding ’round the feeding trough.

    • Cam Fitzgerald May 15, 2012, 11:00 pm

      Please Benjamin! Can’t you see what is coming?

    • Benjamin May 16, 2012, 1:58 am


      Seems Fekete was right on time with his latest reiteration. Anyway, consider that latest essay to be an introduction to a more in-depth look at how bonds work. For that more in-depth look, you can pretty much read any of Fekete’s essays. To view those, simply chop off from the above link everything past articles/.

    • Robert May 16, 2012, 11:32 pm

      Fekete is a Stud.

      Oh, and Cam, to your question “Can’t you see what is coming?”… I can, and it looks an awful lot like idiocy doing what idiocy does… it shifts the accountability for its own idiotic actions onto the backs of other idiots.

      In this case, eventually the legislators are going to go after the Central Bankers, since doing so is already steadily building validity as a viable polictical strategy for maintaining political relevance and positional authority with the sheeple.

      When you contemplate the phrase “print or die” what does it really mean? Simply, it means that currency debasement is the ONLY product that Central Banks produce and sell.

      The second you begin to believe that the Fed is actually going to sit on it’s hands while its precious “wealth effect” in the stock market evaporates, then you are also placing faith that the politicians won’t take notice eventually and say “Gee- our central bank sure hasn’t been doing much lately- Do we really have a reason to keep them around? We could blow them away and spin it in the press as part of our comitment to cost-reduction in government….”

      I sense Cam (please correct me if I’m wrong) that you equate near term market pricing trends with longer term economic and societal trends.

      The Silver price was parabolic to the upside 13 months ago. Today it has gone parabolic to the downside…

      So, why were you screaming to sell the parabolic up trend 13 months ago, and now you are screaming to sell the parabolic down trend today?

      You are convinced that market price trends imply deflation and societal upheaval… I fail to see how the two are aggregated. Most people pay zero attention to the stock or commodity markets.

      Looking out the window from my office right now, I see the same number of cars on the road that I saw a year ago…. do any of the drivers of those cars know the spot price of Gold?

      If there were to be a great deflationary deleveraging, then would not unemployment already be spiking higher?

      Last week, consumer confidence surprised to the upside, and just this morning, the US manufacturing numbers REALLY jumped… This is deflationary?

    • Cam Fitzgerald May 17, 2012, 9:13 am

      Robert, you are reading too much into domestic numbers and coming to the wrong conclusion. Take a step back and look at the macro picture. We are without a doubt on a deflationary trend now and that will in time show up not only in employment numbers but in aggregate spending, consumption, manufacturing output, commodity pricing and pretty much everything that is important if you invest.

      After reading your comments I kind of wonder why you don’t just go out, buy a horse a grow a set. Man, you talk like a girl.

    • Robert May 17, 2012, 5:50 pm

      “After reading your comments I kind of wonder why you don’t just go out, buy a horse a grow a set. Man, you talk like a girl.”

      – I already have a horse. I already have “a set”.

      I also have, seemingly in opposition to your own personal assets, a rational and analytical brain.

      The rest of your closing remark was a deliberate troll. You’ll have to excuse me for not biting at that. I have a whole catalog of ad hominem retorts I could lay out, but nah.

    • Robert May 17, 2012, 5:52 pm

      “Take a step back and look at the macro picture. We are without a doubt on a deflationary trend now and that will in time show up not only in employment numbers but in aggregate spending, consumption, manufacturing output, commodity pricing and pretty much everything that is important if you invest.

      Hmmm- the Japanese planet thesis.

      I’ll simply disagree with you and go about my other business…

  • Rich May 15, 2012, 5:24 am

    We like to buy bad news.
    JPM targeting +130%.
    Silver targeting +107%…

  • John Jay May 15, 2012, 4:14 am

    Declining commodity prices are probably some combination of the following:
    1) Lack of fresh Fed free money.
    2) Players taking profits on positions payed for by
    previous Fed free money.
    3) Mutual fund/401k/IRA redemptions thanks to Fed
    free money paying no interest to retirees.
    4) Euro banks selling off winners to raise cash.
    5) Take a look at the books on the COMEX to see what
    is happening there.
    At any rate I see a 200 EMA on a weekly chart at 25.41 for silver and 1310 for gold
    On a monthly chart I see a 40 EMA at 26.82 for silver and 1367 for gold.
    I have no idea when or where PMs will finally bounce hard.

    I think the Fed is waiting on more serious QE to see how much money comes running here to our bond market from Europe. ZB is at 146^16 at this moment, the record high at 147 is very close. ZN was already at an all time high of 133^19.5 Monday.

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