Gold Price Reflecting Mike Maloney’s “First Deflation Then Inflation”

The price of gold has a hard time in 2013. While it bounced off a multi-year low at $1,325 (in mid-April) it has struggled to hold above $1,400 (or €1,100). One could rightfully ask in which world it is possible to have a declining gold price in the midst of an unprecedented expansion of the monetary base (read: expansion of central banks’ balance sheets). The answer, although not visible right away, is obvious: deflationary forces are prevailing at the moment.

To prove that point, we show the latest monetary data from the St Louis Fed. The following chart presents the US monetary base M0 (which is the Fed’s balance sheet) in red, and the money supply M2 in green. What appears from this chart is that the US central bank has accelerated the expansion of its monetary base lately. There is nothing new here. But the tricky part is that the money supply is growing only slightly; it has increased 1.6% over the last half year while the monetary base has gone up by 25%. There are no up-to-date European figures; that’s why we can only show data from the US.


We remind readers that inflation and deflation are not determined by the expansion of the monetary base, but by the money supply. The fact that the money supply is hardly growing is likely a signal of prevailing deflationary forces. Jim Rickards confirmed this point, although from a different perspective. He pointed out that a strengthening dollar is reflecting deflation, which in turn is causing a lower dollar gold price.

Signs of a depression appear between these numbers (collected by Michael Schnyder). At the same time, the massive monetary stimulus works it way to some corporations and financial institutions; it does not find its way to the majority of the people and economic growth. As we wrote lately, chances are high that we reached a saturation point in the debt based system. In our system money comes into existence through loans created by commercial banks. It seems that people (primarily consumers, but also businesses) simply are not able or willing to take on more loans (debts), which is deflationary.

The presentation from Mike Maloney from some two years ago predicted exactly the same: deflation first, then inflation. It seems that his main premise is playing out as predicted. It’s just the timeline and magnitude that could be of another scale than what he had in mind. Some relevant quotes from his presentation.

I believe there’s going to be deflation first, and then all of the world central banks will start printing like crazy to get us out of that deflation.

What you see here is that there’s a little collapse going on of the currency supply up here, although it’s not huge.

If everything was fine, the Federal Reserve would not be doing that [buying massive amounts of debt from the Treasury]. They’re scared, so it’s happening. They’re doing anything they can to prevent this deflationary collapse that I predicted in my book.

If the public gets scared and they stopped borrowing currency into existence and they save up and pay down debt, the whole thing goes into a deflationary collapse.

His main thesis “First deflation, then inflation” starts exactly at the 34 minute mark.

It goes without saying what will happen with the gold price when this deflationary wave will be combatted by the central banks. Dollar gold at 10,000 at some point in the future could be a reasonable prediction. It just can take some time till opposing deflationary and inflationary forces have worked out.

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