The GOLD scream room

[MediumTex]

If the merchants who are charging higher prices can't get anyone to pay because their wages are flat or falling, they aren't going to be able to keep on charging those prices if they expect to eat.

There is no economic law that says that people can afford to buy anything.
If not enough people can afford to pay merchants the amount they need to stay in business, then they will go out of business. Either way, if people can't afford to buy food, they will starve (for example).

Right, all of which is deflationary. If businesses start failing because people can't pay the prices high enough for them to stay in business, that's a huge downward pressure on prices that will stall the inflation.

Probably the biggest inflation head fake any of us will ever see was what happened in the first half of 2008.  Everyone was absolutely certain that inflation was about to take off, but instead what happened is prices started rising, and at some point POOF, people just suddenly ran out of money because credit began contracting and their wages weren't rising and they just stopped spending.  Housing prices collapsed, the price of oil collapsed, the price of everything collapsed.

People will keep up with rising prices as long as they can through gadget plays like running up credit, tapping savings, etc., but sooner or later an imbalance balance between price increases and wage increases will put a stop to price increases.

If I make $40,000 per year, ultimately I can only spend $40,000 per year.  If the stuff I spent $40,000 on last year costs $44,000 this year, guess what?  I'm not going to be able to buy $4,000 of that stuff, and the people who sell that stuff are going to see their sales go down, which will put a lot of pressure on them to lower their prices if they want to stay in business (see 2008 for a great example of how this works in practice).

[MediumTex]

I don't know what's complicated about this: if the money supply in circulation goes up a lot, prices will go up too.

Including the price of labor.  Why would labor be immune from the general rise in the price of everything because more money is floating around relative to the supply of goods and services?

See Weimar Germany, post-WWII Hungary, or hundreds of other examples. Wages will probably go up with a lag, due to the new money being spent, but they don't have to go up before prices do.

I'm not saying there won't be a lag.  In fact, I would say that there will definitely be a lag, but the wage/price spiral that turns into hyperinflation requires rising wages as a catalyst for continued price increases.

When people talk about a loaf of bread costing $1 billion in some Weimar Germany-like situation, I wonder what the hourly wage is of the guy working in the bakery?  I'll bet it's not $8 an hour.

[buddtholomew]

Well, to give you a sense of where my head is at, I bought some GDXJ September $51 calls today.

Very speculative, but it should make it more fun to watch what the miners do over the next few weeks.

What's your break even price?

I'll keep my fingers crossed for you.

I guess that would depend on whether I held it to the exercise date, right?

If I held it to the exercise date, the share price would need to be $53.50 or so.

When you had your GDXJ trade idea a couple of weeks ago, that's when I should have done this.  The trade looked right to me then.  It still looks right to me now, but a lot of profit was lost while I sat around thinking.

I assume your trade is looking good right now.

Yeah, the best day to buy calls is on a down day, not an up day.

[Mdraf]

but the wage/price spiral that turns into hyperinflation requires rising wages as a catalyst for continued price increases.

Not necessarily. A rise in the cost of energy which drives nearly everything else is enough to set things off.  And energy's price elasticity is steep. Ie. you cannot cut your energy consumption in direct proportion to its increase.

[Libertarian666]

I don't know what's complicated about this: if the money supply in circulation goes up a lot, prices will go up too.

Including the price of labor.  Why would labor be immune from the general rise in the price of everything because more money is floating around relative to the supply of goods and services?

See Weimar Germany, post-WWII Hungary, or hundreds of other examples. Wages will probably go up with a lag, due to the new money being spent, but they don't have to go up before prices do.

I'm not saying there won't be a lag.  In fact, I would say that there will definitely be a lag, but the wage/price spiral that turns into hyperinflation requires rising wages as a catalyst for continued price increases.

When people talk about a loaf of bread costing $1 billion in some Weimar Germany-like situation, I wonder what the hourly wage is of the guy working in the bakery?  I'll bet it's not $8 an hour.

Yes, of course wages are a price and they will go up too in a hyperinflation. But they are not the cause of the hyperinflation; the money printing is. So that's what is important to watch, not wages.

[Pointedstick]

Well now we're back to our old disagreement: is inflation a measurement of the movement of prices or the growth of the money supply?

[MediumTex]

Yes, of course wages are a price and they will go up too in a hyperinflation. But they are not the cause of the hyperinflation; the money printing is. So that's what is important to watch, not wages.

...and thus until wages start rising there can be no hyperinflationrary scenario, right?

You could see a few years of 4-5% inflation with little to no wage gains, but I would say not much more than that without wages following in some way.

In a globalized world with countless offshore labor markets to send many more U.S. jobs to, I just don't see wage increases getting a lot of traction across the whole economy.

I just see the economy limping along with relatively soft demand, static wages and periodic episodes of inflation preceding recessionary conditions.

It's what you might call a "whimper economy."

[dragoncar]

Yes, of course wages are a price and they will go up too in a hyperinflation. But they are not the cause of the hyperinflation; the money printing is. So that's what is important to watch, not wages.

...and thus until wages start rising there can be no hyperinflationrary scenario, right?

You could see a few years of 4-5% inflation with little to no wage gains, but I would say not much more than that without wages following in some way.

In a globalized world with countless offshore labor markets to send many more U.S. jobs to, I just don't see wage increases getting a lot of traction across the whole economy.

I just see the economy limping along with relatively soft demand, static wages and periodic episodes of inflation preceding recessionary conditions.

It's what you might call a "whimper economy."

You could also call that "homeostasis"

[AdamA]

When you had your GDXJ trade idea a couple of weeks ago, that's when I should have done this. 

Maybe, but you bought a much shorter term call than I did, so it seems like it would have been difficult to intuit that things would rebound so quickly back in early July (although I see your point...a lot of upside to having taken the gamble then).

I assume your trade is looking good right now.

The position is up about 15% so far.  LEAPS positions can be a little stubborn, especially when they're not very deep in the money.  (I'm not complaining though). 

The plan is to hold for a year and then sell it.  If the Miners are still beat down, I'll probably buy a new position then (for Jan 2016).  If not, I'll probably take whatever profits I make and call it a day. 

I also bought some Potash calls recently.  They haven't done much, though. 

[Libertarian666]

Yes, of course wages are a price and they will go up too in a hyperinflation. But they are not the cause of the hyperinflation; the money printing is. So that's what is important to watch, not wages.

...and thus until wages start rising there can be no hyperinflationrary scenario, right?

You could see a few years of 4-5% inflation with little to no wage gains, but I would say not much more than that without wages following in some way.

In a globalized world with countless offshore labor markets to send many more U.S. jobs to, I just don't see wage increases getting a lot of traction across the whole economy.

I just see the economy limping along with relatively soft demand, static wages and periodic episodes of inflation preceding recessionary conditions.

It's what you might call a "whimper economy."

No, you have the causality backwards. Hyperinflation is the cause; rising prices, including prices for labor ("wages") are the effect.

Again, this isn't that complicated. Suppose the government prints $100 Trillion and gives it to me, then I spend it by buying every barrel of oil available for purchase in the world. Will that make prices go up? Yes. Will it make wages go up? Yes, but only after prices go up. The net effect is to impoverish everyone else except me.

[MediumTex]

You're not getting what I'm saying.

I'm not suggesting that there is or isn't a causal relationship between rising prices and rising wages.

What I'm saying is that if we know that part of the process of moving into a hyperinflationary environment is that all prices will begin to rise, including the price of labor, then an easy shorthand way to be able to tell if we are moving into those conditions is to simply check your own paycheck.

When the canary in the coal mine dies, it's not the canary's death that makes the air poison, but the observation that the canary has died nevertheless tells you a lot about the condition of the air in the mine.

If someone runs up to me Chicken Little-style and says "Hyperinflation is coming!  Hide!", my first question will be "Have you seen any increases in your own wages lately?"  If he says that his wages haven't changed at all, I'm probably not going to be alarmed.

If, however, someone walks up to me and casually says "You know what?  My employer finally saw what a special employee I am.  Even though I am doing the same job and doing it the same way I always have, I just got a 10% raise.  How do you like that?"  THAT would make me nervous about the potential for future inflationary conditions.

[Pointedstick]

If someone runs up to me Chicken Little-style and says "Hyperinflation is coming!  Hide!", my first question will be "Have you seen any increases in your own wages lately?"  If he says that his wages haven't changed at all, I'm probably not going to be alarmed.

What about the time lag, though?

I guess that would require rising prices first.

[Mdraf]

Inflation is defined as "too much money chasing too few goods and services". Thus there can be too much money but if there is factory overcapacity there is no "too few goods". If there is an abundance of unemployed there is no "too few services".  Hence despite a lot of money printing prices don't rise until there is an equilibrium or shortage of goods and labor.  By that time it's too late to undo the excess money in circulation and hyperinflation takes off.

[Libertarian666]

You're not getting what I'm saying.

I'm not suggested that there is or isn't a causal relationship between rising prices and rising wages.

What I'm saying is that if we know that part of the process of moving into a hyperinflationary environment is that all prices will begin to rise, including the price of labor, then an easy shorthand way to be able to tell if we are moving into those conditions is to simply check your own paycheck.

Why would I wait for that to happen, when an earlier warning is that I will see prices start to rise weekly at the supermarket?

[MediumTex]

You're not getting what I'm saying.

I'm not suggested that there is or isn't a causal relationship between rising prices and rising wages.

What I'm saying is that if we know that part of the process of moving into a hyperinflationary environment is that all prices will begin to rise, including the price of labor, then an easy shorthand way to be able to tell if we are moving into those conditions is to simply check your own paycheck.

Why would I wait for that to happen, when an earlier warning is that I will see prices start to rise weekly at the supermarket?

Because that could easily be a false signal about what's going to happen in the future.

That's what happened in the first half of 2008, and what followed was five years of very low inflation.

Part of the cause of the recession in 2008 was that people ran out of money to pay the higher prices for housing, debt service and everything else.  When they ran out of money, defaults started, demand got very soft across the whole economy, and the pullback in spending put strong downward pressure on prices.

[MediumTex]

If someone runs up to me Chicken Little-style and says "Hyperinflation is coming!  Hide!", my first question will be "Have you seen any increases in your own wages lately?"  If he says that his wages haven't changed at all, I'm probably not going to be alarmed.

What about the time lag, though?

I guess that would require rising prices first.

That's what I'm saying.  UNTIL wages start rising in some way, I will view the rise in the prices of other products and services as either transitory or that low grade fever of 3-4% inflation that the Fed targets.

Is anyone suggesting that you can have hyperinflation without rising wages?  If you agree that rising wages are a necessary component for any hyperinflationary scenario, then we are saying the same thing.

In a situation with relatively high unemployment, zero interest rates, excess industrial capacity, private sector deleveraging and a demographic profile that is not conducive to economic expansion, sustained inflation is not near the top of the list of things that I worry about.  If, however, I see sustained wage increases I will definitely revisit that position.

[Libertarian666]

You're not getting what I'm saying.

I'm not suggested that there is or isn't a causal relationship between rising prices and rising wages.

What I'm saying is that if we know that part of the process of moving into a hyperinflationary environment is that all prices will begin to rise, including the price of labor, then an easy shorthand way to be able to tell if we are moving into those conditions is to simply check your own paycheck.

Why would I wait for that to happen, when an earlier warning is that I will see prices start to rise weekly at the supermarket?

Because that could easily be a false signal about what's going to happen in the future.

That's what happened in the first half of 2008, and what followed was five years of very low inflation.

Part of the cause of the recession in 2008 was that people ran out of money to pay the higher prices for housing, debt service and everything else.  When they ran out of money, defaults started, demand got very soft across the whole economy, and the pullback in spending put strong downward pressure on prices.

Really? You saw prices start rising weekly at the supermarket in 2008? I don't recall that happening.

Anyway, this is of academic interest (if that) to me, as I'm ready for hyperinflation pretty much all the time.

[MediumTex]

Why would I wait for that to happen, when an earlier warning is that I will see prices start to rise weekly at the supermarket?

Because that could easily be a false signal about what's going to happen in the future.

That's what happened in the first half of 2008, and what followed was five years of very low inflation.

Part of the cause of the recession in 2008 was that people ran out of money to pay the higher prices for housing, debt service and everything else.  When they ran out of money, defaults started, demand got very soft across the whole economy, and the pullback in spending put strong downward pressure on prices.

Really? You saw prices start rising weekly at the supermarket in 2008? I don't recall that happening.

Anyway, this is of academic interest (if that) to me, as I'm ready for hyperinflation pretty much all the time.

The dominant market narrative in the first half of 2008 was inflation.  The price of oil was hitting $150, the price of gas was going nuts, the price of gold was hitting $1,000 for the first time, food prices were increasing, and interest rates were rising. 

You don't remember all that?

I agree with you, though, about it being academic for someone who follows a PP-like strategy, since they are ready for inflation at all times.

[Mdraf]

Because that could easily be a false signal about what's going to happen in the future.

That's what happened in the first half of 2008, and what followed was five years of very low inflation.

Part of the cause of the recession in 2008 was that people ran out of money to pay the higher prices for housing, debt service and everything else.  When they ran out of money, defaults started, demand got very soft across the whole economy, and the pullback in spending put strong downward pressure on prices.

Really? You saw prices start rising weekly at the supermarket in 2008? I don't recall that happening.

Anyway, this is of academic interest (if that) to me, as I'm ready for hyperinflation pretty much all the time.

The dominant market narrative in the first half of 2008 was inflation.  The price of oil was hitting $150, the price of gas was going nuts, the price of gold was hitting $1,000 for the first time, food prices were increasing, and interest rates were rising. 

You don't remember all that?

Weren't you arguing the exact opposite with me a few weeks ago?
http://gyroscopicinvesting.com/forum/pe ... /#msg71734

[MediumTex]

The dominant market narrative in the first half of 2008 was inflation.  The price of oil was hitting $150, the price of gas was going nuts, the price of gold was hitting $1,000 for the first time, food prices were increasing, and interest rates were rising. 

You don't remember all that?

Weren't you arguing the exact opposite with me a few weeks ago?
http://gyroscopicinvesting.com/forum/pe ... /#msg71734

In my discussion with you, I was arguing that in the last five years inflation has been pretty low.

In the first part of 2008, however, there was a LOT of chatter about how inflation was getting ready to take off.

Below is the chart of food prices I posted in our discussion a couple of weeks ago.  See how food prices were rising steeply in the first part of 2008.  That's what I'm talking about when I talk about inflation expectations in the first part of 2008.  People were extrapolating similar price increases for the foreseeable future (those predictions were, of course, totally wrong).

[annieB]

Damn Gold has gone mental again.
#@+**^%#** !!!!

[MediumTex]

Damn Gold has gone mental again.
#@+**^%#** !!!!

Did gold go mental or did you?

The event and the responses it triggers can sometimes be confused.

Prices go up, prices go down, over time the whole portfolio drifts higher.

[buddtholomew]

http://finance.yahoo.com/news/gold-slam ... 00844.html

Others are perplexed at gold's reaction given the recent shutdown. It is difficult to ignore the possibility of intervention or manipulation in the PM markets.

[Pointedstick]

MT's explanation in the other thread makes more sense to me. I don't think it's perplexing at all. Gold has several triggers for upward price movements:
1. Rising/high inflation
2. Falling/low real interest rates
3. Threat of financial disaster or collapse; fear in the markets

The government shutdown doesn't cause any of those things. If anything, as MT pointed out, by ceasing a bunch of spending, a minor deflationary input has been added, which is bad for #1 and #2 from gold's perspective.

As for fear in the markets, even the stock market doesn't seem to have cared one whit. Stocks rose today! I'd say the financial markets definitely didn't spend the past month watching TV news and getting themselves scared to death.

[buddtholomew]

MT's explanation in the other thread makes more sense to me. I don't think it's perplexing at all. Gold has several triggers for upward price movements:
1. Rising/high inflation
2. Falling/low real interest rates
3. Threat of financial disaster or collapse; fear in the markets

The government shutdown doesn't cause any of those things. If anything, as MT pointed out, by ceasing a bunch of spending, a minor deflationary input has been added, which is bad for #1 and #2 from gold's perspective.

As for fear in the markets, even the stock market doesn't seem to have cared one whit. Stocks rose today! I'd say the financial markets definitely didn't spend the past month watching TV news and getting themselves scared to death.

Those weekly amounts are minor in comparison to the 85B in monthly purchases and dont warrant a 3% decline. If anything, gold should habe risen now that tapering in October is less likely with the shutdown.