The Real Cause of Hyperinflation
What's the real cause of hyperinflation?
Oh boy, I know I'm wading into dangerous territory already. People either hate you or love you for even mentioning hyperinflation, and though many people in the "gold-bug" crowd see hyperinflation as some kind of eventual dream to come true - I have no illusions that such an event will be sunshine and lollypops.
As I've written before, inflation can be a nightmare, even for people who are adequately prepared for it - as in the case of folks who had their gold seized by FDR in 1933.
But today I'm not going to talk about how to protect yourself from hyperinflation. I'm going to talk about the most significant cause of hyperinflation.
When you mention the word hyperinflation, everyone immediately thinks of two scenarios:
1. The infamous German Weimar hyperinflation between 1910 and 1923.
2. The recent Zimbabwe hyperinflation between 2006-2008.
For some perspective, the Weimar event, though it might be the most famous since it paved the way for a German populous angry enough to elect Adolf Hitler to power, is by no means the worst hyperinflation.
But take a look at how quickly and drastically Weimar Deutsche Marks lost value:
In any event, any type of hyperinflation means the total destruction of currency value. And people usually have 2 main theories as to why hyperinflations occur.
You might hear that money-printing was the root cause for both Zimbabwe and Weimar hyperinflations. A slightly more sophisticated inflation student might claim that money-printing has little effect on inflation until and unless "money velocity" upticks - when people try to spend their devaluing currency en masse.
We certainly saw both money creation and velocity in these two examples.
And while those two ingredients are necessary for a hyperinflation, they're not the most important.
The real root cause of this type of currency crisis is neither money printing nor velocity.
It's confidence.
Or rather, the lack thereof.
When people lose confidence in their currency - whether there's money printing, high velocity or not - it tends to lose its value in a hurry.
So...to go further down the rabbit hole - why do people lose confidence?
People lose confidence in their currency when they lose confidence in the politicians that govern their currency.
Today in the euro-zone, there's certainly plenty of money printing. And while we have yet to see the type of rabid "velocity" as people seek to rid themselves of euros like hot potatoes, the confidence in euro-zone politicians is definitely on the wane.
The devaluation of principles is well underway. Ideas like sovereignty, democracy, and fairness are burned at the pyre of euro-salvation. The very due process of law and legality are bent and twisted to save a currency!
How much confidence do Europeans have left in euro politicians? The devaluation of this confidence will eventually hit a level where no one believes the euro's keepers are capable or willing of fixing anything.
That will mark the end of the end of the total destruction of the euro.
*Post courtesy of Kevin McElroy of Wyatt Research.
Nightmare Gold Scenario
- A reader’s concern
- My must-read thesis on gold investing
- The gold investment with 1,000% upside
Yesterday I wrote about the prospect of the U.S. Federal Government seizing or outlawing the private ownership of gold bullion.
In short, my conclusion was that it would be too difficult and unconstructive for the government to seize or outlaw gold.
And perhaps I simply don’t have the remarkably creative mind of a revenue-strapped politician - but some readers wrote in with some other scenarios that I hadn’t considered.
Assaf K. wrote:
“Governments don't have to seize gold to make it an unpalatable investment. They can increase taxes on gains from precious metals transactions. Alternatively, they can impose various fees and commissions on any such transactions. I wouldn't disparage the creativity of Obama et al. when it comes to capital controls.”
That’s definitely a realistic scenario. Already, capital gains from gold and silver are taxed at an individual’s personal income tax rate, rather than at the lower capital gains tax rate. With income taxes due to rise next year, it wouldn’t surprise me if President Obama and his Democrat led Congress saw fit to raise taxes on gains made in gold and silver, and otherwise introduce a variety of Orwellian measures to stymie the lure of investing in precious metals.
From a strictly utilitarian perspective, a revenue grab from gold’s “increase” in price makes total sense.But I want to remind Assaf and other readers of my own humble thesis about gold. I don’t buy gold (and silver) to “make” money. Economists on both sides of the gold argument are quick to point out that gold does not bear interest, nor does it produce income or cash flow or truly appreciate in value. Warren Buffett reminds us that “Price is what you pay; value is what you get.”
The price of gold changes with regard to currency fluctuations, but the value stays about the same.
Of course, there are situations that cause the price of gold to increase more than inflation in the currencies it’s priced in. But I’m not trying to speculate on the price of gold.
I buy gold and silver because it’s a store of value that stays relatively the same no matter what happens to dollars, euros, yen or any other currency. From a fundamental perspective, owning gold and silver is a way to preserve wealth, not grow it.
So investing in physical gold and silver for the gains doesn’t make much sense. And if the government wants to impose fees and commissions on such transactions, I see that as bullish for precious metals.Right now, there are so many ways to get exposure to physical gold and silver, that it would be difficult if not impossible to close all of the loopholes.
I buy gold and silver stocks for the exact opposite reason that I buy the physical metals. Whereas I buy bullion and keep it safe at hand for safety and reliability, I buy gold stocks as a speculation that they will skyrocket.
Junior precious metals companies are notoriously risky investments. But if you catch a rising star in this sector, you can multiply your initial investment by ten or even a hundred-fold. It’s not the type of investment you want to back up the truck on - but at the same time, even a small stake gives you a chance to significantly impact your net-worth.
Whereas gold bullion is fungible and widely accepted across the borders of countries, and throughout the history of mankind, junior gold stocks, again - are the complete opposite.
Most junior gold stocks are complete garbage. It’s vital to buy the best companies, with the best management, with the most cash and the best resources. Only these companies have the ability and likelihood to multiply your investment many times over.
Let me give you one quick example of a company that I think could return 1,000%-10,000% gains.
It’s a small North American company located in a remote mountain region. It has a market capitalization of about $200 million - but it has the mining rights to over $20 billion worth of proven gold reserves. If they mine just 5% of that gold, it will yield them $1 billion at current gold prices. Those sales would be quadruple their current market cap.
So if you’re wondering how a junior gold mining company can return between ten and 100 times your investment, imagine if they mine 50% of that gold at the same time gold prices rise another 50%. Their fair market value alone would go up 50-fold.
The best part about this company is that they’ve already proven their profitability. Their mines are currently in production, and last year they produced 70,000 ounces of gold - that’s $84 million worth of the yellow metal. This year they expect to produce even more.
This company is my favorite in the sector, by far. At less than $4 a share, you can buy a significant number of shares for just a few thousand dollars - and if they get even a fraction of their proven reserves out of the ground, you could make some serious gains.
If you’d like to hear more about this company, I strongly encourage you to read the full write-up byclicking here now.
Have a good weekend,
Kevin McElroy
Editor
Resource Prospector
Will the government seize your gold?
- The Obama-FDR connection
- An unlikely scenario for gold
- My favorite gold investment today
Today’s topic might seem somewhat oblique to general investment strategy, but I think the ramifications of this issue are kind of an 800 pound gorilla in the room.
Some very intelligent, highly successful, amazingly talented gold investors routinely suggest that the end-game for the dollar will be preceded by the seizure of gold assets by the Federal Government.
If there’s a significant likelihood that gold will actually become illegal, then all my suggestions and research intended to help you find compelling gold investments are completely off course. It won’t matter if I help you find your next 10-bagger gold stock if the government seizes gold assets and halts trading on such companies.
So I want to tackle this issue head on.
This undercurrent of worry in the gold investment community may be born from the fear that history sometimes tends to repeat itself. Gold investor’s prudence in holding gold may be punished by President Obama’s administration, should he choose to replicate the policy of President Franklin Roosevelt and outlaw the ownership of gold. There’s no doubt that as the 'Godfather of liberal thought' that Obama looks up to FDR, and certainly wishes to follow in the footsteps of one of America’s most popular presidents.
You can read FDR’s entire Executive Order outlawing gold by clicking here. Pay special attention to Section 2.
It seems like a strange Orwellian dream that in this country between 1933 and 1971 owning gold bullion was illegal. The move was entirely evil, but I completely understand why it was confiscated - the Federal Government couldn’t inflate its currency to pay for war, public works and social programs without first confiscating gold.
That was because all dollars up until that point were convertible to gold - so if the Government simply printed excess dollars, it would soon find itself running out of gold, which could cause another run on banks, and might result in the complete destruction of the currency.
It’s the very idea of outlawing the ownership of something so innocuous and mainstream that I can’t wrap my head around. For instance, if tomorrow the government outlawed aluminum foil or sacks of barley under penalty of fines and imprisonment, it would be just as strange.
To outlaw gold today doesn’t seem to make much sense to me, especially since it wouldn’t directly enable the government to pursue some other monetary policy. Outlawing gold would be strictly punitive, and not very constructive. I suppose you could make the same case that the War on Drugs isn’t very constructive and is only punitive, but there’s no public perception that buying gold destroys lives, so I don’t see the political upside for taking gold down the same road.
In the same way that legislators in Congress are currently working on the final version of a massive new bill to further regulate the derivatives markets, I can imagine a time when it might be politically expedient to pass a bill further regulating foreign exchange (ForeEx) traders, and maybe such a bill would include language outlawing the exchange of Federal Reserve notes for speculative assets such as gold?
I’m grasping at straws here because I just don’t see how a 'gold ban' would work. The only thing a ban on gold would accomplish at this point would be to make gold skyrocket in price. It wouldn’t strengthen the dollar unless the Federal Government then turned around and sold all of its seized gold to foreign banks - but at that point the dollar would be so worthless I don’t see how it would really help all that much.
And logistically, I don’t know how the Government could do it. The kind of person who bought gold as a way to hedge against inflation and dollar insolvency isn’t very likely to render their gold back to Caesar very willingly, I imagine.
If you have any thoughts on this topic, please share them by writing to me at editorial@resourceprospector.com.
I think all gold investors view their gold purchases, at the very least, as a type of hyperinflation insurance.Hyperinflation is clearly the worst case scenario for the dollar, and there are plenty of historical examples of what happens in countries that experience such inflation.
The history of currency destruction and the government response to it is surprisingly unmarred by violence, coercion and marshal law. From Zimbabwe, Hungary, Austria, Germany, Argentina - history is replete with countries that printed their currencies into oblivion. All of these countries attempted currency controls, but these types of policies really don’t hold much water with a populace that needs to eat. And typically, regimes in power during hyperinflation don’t stay in power very long.
So to answer the question - even in the worst case scenario, I think it’s highly unlikely that the Federal Government would or could outlaw and seize private gold holdings.
As I said earlier this week, gold and productive gold companies are a great long term hedge against inflation. I’m careful to make the distinction between gold companies, and gold companies that are actually able to get gold out of the ground. Most junior gold companies do not produce any gold. That’s why it’s important to buy the best companies, with solid balance sheets that have proved an ability to actually bring gold to market.
Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report all about a small North American gold miner that’s currently selling for less than $4 a share. They’re already producing gold. Last year they produced over 70,000 ounces of gold, and they have over 20 million proven ounces. At today’s prices, that’s $25 billion worth of gold. But they’re only a $200 million company – so as they continue to bring that gold to market, I expect shares to soar.
They really are the best junior gold miner in the market today.
Buying this company today is the equivalent of buying their gold reserves for $120 an ounce.
You can read more about this company by clicking here.
Good investing,
Kevin McElroy
Editor
Resource Prospector
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