April 2013 Intelligent Investor Part 1 Opening Statement

Recently I wrote an article discussing reasons for the retreat in gold pricing. As I have done countless times in the past, I pointed out the common myth held by gold bugs that gold protects against inflation.

By now you should realize that gold does not protect against inflation. Anyone who has bothered to examine the data will confirm this.

Even if gold did serve as a hedge against inflation, the fact is that there has been very little inflation to speak of despite the large increase in the money supply.

As discussed many times in the past, the reason for the lack of inflation in the face of the massive expansion in the money supply has been due to the fact that the banks have kept most of these funds for their own use. As a result, consumers have not had excessive credit to buy up goods and services, hence why there has been no inflation.

Certainly, when it comes to basic necessities other than housing, inflation has risen considerably over the past few years. Price increases seen for food, energy, higher education and healthcare have greatly outpaced all other components of the economy. As a result, the working class has been hit particularly hard, especially due to the absence of real median wage gains. Nevertheless, overall inflation has not been a major issue.

Since the vast majority of gold bugs continue to embrace the hyperinflation propaganda, we must ask why gold has failed to rise over the past two years. Moreover, we must also ask why the price has collapsed. 

Gold charlatans have offered several reasons why the official inflation data isn’t giving us the full picture. Their most common claim is that the government is hiding the data.

As possibly the first person to have written a full book chapter explaining how government economic data is manipulated (America’s Financial Apocalypse), I feel it’s safe to say that I know the extent to which this claim is valid. In short, gold charlatans have taken half-truths and exaggerated them in order to scare people into buying gold and silver. But I can assure you that no serious investors pay attention to this trash.

When the Fed announced “unlimited QE3” last year, gold bugs were sure gold would skyrocket.  But of course gold has done just the opposite.  In other words, as more QE was announced, one would have expected gold bugs to have bought more gold in anticipation of higher prices.

The reasoning behind this expectation is based on their misguided beliefs that gold protects against inflation and that inflation automatically results from an increase in the money supply. The problem is that the price of both gold and silver has continued to fall for nearly two years.

Because the majority of gold bugs think inflation is very high and going much higher, aren’t they lining up to buy more gold?  If so, why is the price falling? If they’re not buying gold, why not? What’s going on?

Although gold has faced several periods of bearish activity throughout its twelve year bull market, the current bearish trend is the most persistent since the bull market began in 2001. This bearish activity has not only baffled gold bugs, they are in fact becoming quite worried, with good reason.

After all, the Federal Reserve continues to add to its quantitative easing program, which, according to gold bugs is causing massive inflation; or at least is going to lead to massive inflation, if not hyperinflation, right?

As I pointed out in a previous article, retail investors do not control pricing of gold or silver. While the retail market can impact gold and silver pricing to some extent over the short term, the pricing is ultimately controlled by the various central banks in the G-7 along with the major Wall Street firms (which are also located in Europe).

Central banks like Wall Street understand that gold does little to protect against inflation. But they also know that gold provides a hedge against deflation. Deflation is typically caused by large macroeconomic or geopolitical shocks.

So with the recent crisis in Cyprus, why has gold pricing continued to weaken? After all, at its height, “experts” everywhere were warning how the banking crisis in Cyprus was going to spread throughout Europe and cause a global financial crisis. Do you remember? These expectations should have caused gold to soar in price, right?  Instead, gold has done nothing during the Cyprus crisis. So why has gold lost its appeal?