The Gold Enigma*Updated

First off, I am glad that gold and silver are taking a cliff dive. It has been absolutely breathtaking and it's going to take a lot more than two days worth of diving to shake my resolve. This should have happened long ago. This may be the beginning of deflation. It is the natural by-product of loose credit.

In 2002, Ben Bernanke announced in a speech that he believed deflation was the single greatest problem facing the United States after 1929. It was deflation that Bernanke vilified as the culprit that extended the Great Depression- nowhere did he mention that it was the ridiculous amount of credit being extended by banks. Credit in terms of real money- real money that had never existed to begin with.

By 1933, the government seized American gold so that they could revalue gold higher and issue additional and now unbacked worthless fiat currency. It was one of the greatest thefts in American history accomplished apparently without thought to the fourth amendment which was designed to protect Americans from illegal searches and most importantly- illegal seizures. Depriving a citizen of his privacy and the use of his property used to command the utmost attention- but by 1933 and the usual sales pitch- it meant nothing.

The same thing would re-occur within a few short years when the American government decided to deprive Japanese Americans of their civil rights and property.

It amazes me that our government can simply ignore the law of the land whenever it so chooses. They always have a decent excuse and they will always have a cadre of statist cheerleaders cheering them on. Convince one person beyond a draw and you get a mob rule democracy.

Which brings me to the present day.

With the re-occurrence of the same loose credit conditions that caused the Great Depression- the Federal Reserve has been bailing water on the good ship US Titanic since 2007. By manufacturing money and sticking it in member banks' pockets- the Fed has caused the greatest equity bubble of all time.

Thus the enigma of our time, due to the unprecedented printing of 7 trillion in stimulus, has been trying to figure out how all of this plays out and ends. Having read gobs of economic theory, economists from every school, and watching this drama unfold- has left me with one inescapable conclusion. I am convinced...

That absolutely nobody knows how the hell this is going to turn out. All we do is guess. That's why they call it an enigma. Hell we don't even know when QE will end.

There is only one thing that I have been fairly confident about. Something that has occurred at the end of every credit expansion when the bubble pops. Deflation.

Deflation never had a chance to square it's account. Sure, there was some deflation occurring in late 2008 and that fact is borne out in the BLS stats for that period. Before deflation could take hold and punish the people who deserved punishing- the borrowers- Ben Bernanke swooped in and began the greatest money printing campaign of all time. He created stagflation (with plenty of inflation) to avoid deflation and managed to screw every saver in this country.

Which brings me to the present day. Why am I happy that gold and silver are taking a nosedive?

Quite simply, this may be the start of the deflation that should have occurred in 2008. In fact, there are deflationary signs everywhere. They were simply delayed. I have always believed that a serious round of deflation followed by Fed induced inflation was the only way this fiasco would resolve itself. Think about Japan. They have never accepted their medicine. The best way to describe this is by metaphor.

You can keep a brain dead patient alive indefinitely until such point that the people with standing eventually realize that the life is over. That their loved one is not coming back. This comatose economy is a perfect example of that.

What is skewing our ability to accept that which we have been evading for 5 years- is that we have bought into this idea that this time it is different. The only thing that has been different  this time is the willingness of the FED to QE everything and a government more than happy to help sell the lie by manipulating markets and statistics.

Maybe, this will all unravel soon. The metals, as well as other commodities, are due for a bout of deflation. So are economies and currencies. I'm not sure just how much longer the Fed can keep the patient on life support but then again- that is the great enigma.

None of us are sure anymore.

So you can read all of the gold analysis you want, lord knows I do that everyday. If you are anything like me- it will simply re-enforce your belief that nobody knows what's going to happen and when. The only thing that I know for sure is that I would rather own gold and silver than nothing at all.

*UPDATE

*Dave in Denver reported in his comments today that Andrew Maguire's version of what happened seemed the most plausible. I snipped this piece from the KingWorldNews site. The London Bullion Market...

“Entities went to the LBMA and said, ‘We don’t trust anybody anymore.  We want our physical metal.’  They were told they would be cash settled instead by a bullion bank.  The Western governments have been trying to plug holes, and the reason for it has to do with the default that was taking place at the LBMA.

This is why this smash has been orchestrated because of the run that has been taking place on physical metal.  So Western governments had to do this because of an imminent run on the unallocated LBMA system.  The LBMA bullion banks had become so mismatched at one point on their trading positions vs real world demand that they had to orchestrate this smash. 

This orchestrated smash in gold and silver was nothing short of a bailout for the bullion banks.  So there is a run on physical gold that is taking place and the Ponzi scheme the West is running is being threatened because of it.”

Maguire also added: “We are nearing the end of this decline.  Physical demand is already beginning to catch up with leveraged paper.  If gold were to trade into the low $1,300s it would be unsustainable for very long.”