World View: Forced Selling Hits Gold, Commodities and Stocks

This morning's key headlines from GenerationalDynamics.com

  • Terrorist attack at finish line of Boston Marathon
  • Forced selling hits gold, commodities and stocks
  • Deflation and hyperinflation
  • Bad economic data plagues China and United States

Terrorist attack at finish line of Boston Marathon

Second Boston Marathon explosion, seen from the finish line (CNN)
Second Boston Marathon explosion, seen from the finish line (CNN)

At 2:50 pm on Monday, terrorist explosions in Boston, about two miles from where I live, killed three people and injured dozens more.

This is the first terrorist explosion on American soil since 9/11. The American public is already extremely anxious about a number of things, and this attack has the potential to harden opinions. The attacker might be an American on the left or right, or it might be a Muslim, or it might be a foreigner (Latino, Chinese, Canadian, or whatever) or it might be a disgruntled worker of some kind. Each possibility will drive a different path in public opinion, and may unite or further divide the American people. CNN

Forced selling hits gold, commodities and stocks

The price of gold as a commodity fell 9.3% to $1,362 per ounce on Monday, after falling 5% on Friday. Analysts are afraid that the price of gold is in free fall. According to one analyst, Phoenix Futures President Kevin Grady:

"I think the last $20 has been margin selling. The market is falling like a knife. People are saying, 'Get me out now.' You're also seeing people selling energy profits to pay for metals losses. You're seeing a tremendous amount of gold liquidation today."

It was just a couple of years ago that the price of gold was at $2,000 per ounce, and I had listen to "experts" endlessly talk about how it was going to continue going up, up, up, to $5,000 or even $10,000 per ounce.

Actually, as I've been saying for years, the long-term trend price of gold is around $400-500 per ounce, and gold has been in a bubble since the early 2000s. When the bubble bursts, the price of gold will overshoot the trend, and may fall to the $200-300 per ounce level. Whether that's what's happening now will not be known for a few days or weeks, but it will happen at some point. And people who insist on buying or holding gold are going to lose a lot of money.

The analyst quote above is worth study because it contains a number of important elements. Notice the reference to margin selling, and to the fact that energy investments are being sold to make up for losses in gold.

In a sense, the phrase "panic selling" isn't really accurate, because it implies a kind of insanity. But the insanity isn't in selling -- it's in buying. It was insanity for people to buy gold when the price was near $2,000. It was insanity for people to buy homes six years ago, when home prices had tripled or quadrupled. It's insanity for people to be buying stocks today, when the S&P 500 Price/Earnings ratio (stock valuations) has been far above average for over 15 years.

When the bubble bursts, the selling occurs, but because of necessity, not because of insanity. So it should be called "forced selling," rather than "panic selling." It's well to remember how the crash of 1929 occurred.

Bayer's pre-WW I bottle containing 5 grams of heroin
Bayer's pre-WW I bottle containing 5 grams of heroin

In 1929, it wasn't because people suddenly lost their minds, snorted heroin, and decided to sell everything on a whim. Typically, people had purchased stocks on margin -- had arranged with their brokers to buy stocks for only 10% of the purchase price, in essence borrowing the other 90% of the funds from the broker, who holds the stock as collateral. When the price of the stock begins to fall, then the brokers start calling their clients with "margin calls," which means you'll lose your stocks unless to put up more money. In order to meet margin calls, many investors have to sell other stocks, pushing those prices down. The result of this forced selling is a cascade effect, as margin calls force prices down, which results in more margin calls.

So, according to Grady, that's what happened on Monday with gold. People had purchased gold on margin, and when the price began to fall, they were forced to sell their gold, stocks and other commodities to meet margin calls. If this continues, then there will be a new cascade, and the crash will occur now instead of later. Or perhaps the Fed and other central banks can find a way to intervene and stop the fall, as it's been doing for years.

Deflation and hyperinflation

And that segues to the massive quantitative easing that's been going on. The Federal Reserve has been "printing" an enormous $86 billion per month and pushing it into the banking system through quantitative easing. The European Central Bank (ECB) has been pouring out billions through various bailout programs. But that's nothing compared to what the Bank of Japan is doing. The BOJ is also "printing" $81 billion per month in quantitative easing. But since Japan's economy is 1/3 the size of the U.S. economy, that would be like the U.S. "printing" $250 billion per month, or $3 trillion per year.

With trillions of dollars in new money pouring into the banking system, you'd think that we'd have hyperinflation, but we don't. I've been saying since 2003 that we're in a deflationary spiral, and that hyperinflation is impossible. The "experts" have been predicting "hyperinflation next quarter" continuously. They've been consistently wrong, and I've been consistently right.

This morning on CNBC, market reporter Rick Santelli was talking about the fall in gold prices, and he was asked about deflation. This really set him off, and he started screaming at the top of his lungs:

Rick Santelli discussing deflation on Monday morning (CNBC)
Rick Santelli discussing deflation on Monday morning (CNBC)

"You know what? I'll tell you what. The more I hear about deflation, the more I just wanna pull my eyelashes out. Deflation is gonna cause central bankers to go, ohhhhh we gotta do more to fight deflation. I think it's deleveraging of assets that have gotten bubblicious, through cheap money, and the things central banks look at that were deflation, and they come back and do more of it just shows the LUNACY of what central banks have done to "save our lives." Even gold goes up when you have inflated dollars, and it goes down when you have to pay for it."

Well, Santelli may not like talk of deflation, but that's what we've got. But he's right that the massive outpouring of central bank money has created bubbles in commodities and stocks through debt, and now that debt is being deleveraged through forced selling, forcing prices down.

What's the motivation for all this talk about hyperinflation? My observation is that it's all wishful thinking. People on the left want to see hyperinflation because they want to see the $17 trillion government debt get inflated away. People on Wall Street want to see hyperinflation because they want to convince people to buy stocks. People on the right want to see hyperinflation because they want to sell gold. Deflation is a disaster for all of them, so they'd rather just go into a state of denial.

But from the point of view of Generational Dynamics, inflation does not occur in generational Crisis eras (except for brand new currencies). The famous German Weimar hyperinflation occurred during a generational Unraveling era. Enormous inflation occurred in America from 1977 to 1980, but that was during a generational Awakening era. During the Great Depression and WW II, one country after another suffered deflation, not inflation. You would think that there would be at least one major case of hyperinflation during that period, if only by accident, but apparently there was none. Hyperinflation does not occur during generational Crisis eras. We're in a deflationary spiral, and we're going to stay there.

So we have trillions of dollars in money pouring out of the central banks. Where is it going, and why isn't it causing hyperinflation?

Back in 2003, I received a call from an officer at my bank. She offered to loan me $25,000 because I was such a good long-time customer of the bank. No collateral, low interest rate. Her motivation, of course, is that she gets a commission.

Well, today those things don't happen any more, at least not to me and you, Dear Reader. Those of us in the 99% don't see a dollar of those trillions of dollars. Instead, that money is loaned to the people in the 1%, the people who don't need it, but borrow it anyway, at near zero interest rates, to invest in gold or commodities or stocks. That doesn't cause inflation.

Well, now it looks like that poop is hitting the fan. All those people in the 1% are in debt up to their eyeballs, and suddenly they're getting margin calls. They're forced to sell, which pushes down prices. That causes deflation. Let's see if Ben Bernanke can get us out of this one. CNBC

Bad economic data plagues China and United States

There was a lot of bad economic news on Monday, contributing to the fall in gold, commodity and stock prices:

  • China's economy grew more slowly than expected in the first quarter.
  • In the U.S., the Federal Reserve's Empire State manufacturing index, a key gauge of economic health in New York State, fell to 3.1 in April from 9.2 the previous month, falling far short of market expectations for a decline to 7.0.
  • On Friday, a survey of consumer sentiment fell to a 9 month low.
  • Retail sales in the U.S. fell in March, defying expectations of a rise.
Investing.com


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