Tuesday, May 15, 2012


And so it begins.  In our discussions over the last two years we've described the tendency for central banks around the work to talk a tough game but always resort to liquidity providing measures when push comes to shove.  All developed nations do it, all emerging nations do it, and yes, even the Germans, those steadfast, disciplined, hard-working, determined wunderkinds will fall back on printing and inflation when the cracks in the Euro become too great to ignore.

In the linked article above we are beginning to hear the change in tone of Germans as Peter Bofinger, adviser to the German government, suggests that perhaps a touch of inflation isn't so bad after all.

Here are a few snippets from the interview in Der Spiegel.  Notice how the notion is now becoming more tolerable to allow inflation into the system since this is the only option left for central bankers.  Remember, inflation equals devaluation of the currency.

"SPIEGEL: In 2011, prices in Germany rose by 2.3 percent. Should we fear higher inflation? 
Bofinger: No. During the years of the Bundesbank (before the introduction of the euro), the average loss of purchasing power stood at 2.7 percent per year. We are still far away from that figure. Despite a strong economy, the inflation rate currently stands at just 2.1 percent. And even if prices rose by more than three percent, it would not be a disaster. The logic of the euro-zone is that the booming regions have higher inflation than those that are growing more slowly."

Notice how he suggests that just "a little" inflation would be just fine?

"SPIEGEL: Can faster price growth in Germany help stabilize the currency union? 
Bofinger: Absolutely. If our wages were to rise faster than in the past, thus slightly increasing the inflation rate, that would be a good way to help us get out of the euro crisis. To boost the competitiveness of crisis countries, they can cut their salaries, which is a very painful step -- or, alternatively, our wages could increase further."

This statement actually addresses one of the major concerns that Germans have had for years.  As their wages have been stagnant for the last 5 years they have watched salaries in the weaker Eurozone countries increase 10% - 25%.  How frustrating is that?

The German government is about as willing to accept inflation as the Chinese are open to accept an uncensored internet.  If you are beginning to hear highly respected advisers suggest that inflation wouldn't be the end to the Euro, it is similar to George Bush stating that "We have to abandon free market principles to save the free market".  In other words, options are limited and now we are willing to try things we know are not consistent with our values and that haven't ever worked before.  Another way of saying it is that they are beginning to become desperate.

So what is an investor to do when central banks and governments begin to take actions that are doomed and  can only result in bad things?  The only answer is to invest in commodities.  As we've mentioned over and over central banks ultimately end up seeing printing and devaluation as the answer to every problem, and the only thing that will protect the average Joe will be a healthy holding in hard assets.

As I examine the chart of gold, there really isn't anything here I'm happy about.  Gold's chart looks as though it is now breaking down pretty hard, breaking through support.  Chinese inflation is abating and this spells further doom for commodity bulls.  So how could one disregard technicals and even macro-related indicators?  Simple, what is the one action that can defeat technicals and macro-related events in the short-term (meaning 1 to 3 years)?  Central Bank action of course!  We do need a sudden and major whoosh down in the markets and a little QE3 action by our Fed along with some inflationary targeting by the ECB and we'll see a pretty significant turnaround in hard assets.  Don't go out there and blow your whole wad in one purchase!  I am still sticking to my plan that I will add to my gold at $1,400 and silver at $26.  As you keep hearing how gold and metals are dead, remember that it is when everyone repudiates an asset is when you want to buy it, not the other way around.  I have a sense that this will be the last good chance to accumulate these assets before a significant market dislocation.  No matter what, create a plan and stick to it.

Everything about gold looks nasty here as it has broken down through support and its 14 day EMA is now below the 40 day EMA on a weekly chart.  This is a very bad long-term signal.  There are only two reasons to add gold here.  First, you believe it is a form of insurance.  Second, if you believe in the unfaltering stupidity of central banks to respond with emergency liquidity and printing.  Be aware that if you are a US investor you could be correct in terms of a direction of gold and assets relative to the Euro, but be a net loser if the USD climbs higher.  Be careful adding here and make sure you have a trading plan.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

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