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Editor’s Note March 30, 2010: While it has been some time since we published our commentary below, now is a particularly relevant time to republish it in our view. The rates of deflation below are no longer valid as there has been a rebound in growth in most countries. Nevertheless, we continue to monitor GDP worldwide for any change in trend.

Gold has had every reason to make new highs this Spring. Unprecedented spending by Government and Central Banks, massive amounts of cash looking for investments that are working in this environment (Gold still up marginally on the year), and a banking system that has to be stress tested – the results of which should be scaring everyone in the know. But alas, Gold peaked last year, and since then, has been corrected downwards, despite claims by many that bullion coin and bar purchasing continues at an elevated pace, not a record pace mind you. Recall that in our previous surveys of dealers on availability, we found gold available, and where it was not available, delivery times ranged from a few weeks to months. But generally, the response from mints has been positive, and they are once again accelerating production to match demand. Our latest survey shows no material bullion shortages anywhere. Something has happened in the market now that no one wants to cover, and this is the real story – the one we will continue to write about in the days and weeks ahead. The story is, the world has fallen into a Deflationary growth recession, and some very familiar countries are currently experiencing a Depression.

Every major economy is either slowing, or in outright recession. We can now enhance this statement and say that the following countries[1] are experiencing Depressions as defined by an annual decrease of GDP > 10%[2]:

Japan: Annual decrease in GDP is 12.1% and falling

Singapore: Annual decrease of 16.4%, and free falling; just devalued its currency

South Korea: Annual decrease of 20.8% and in serious crisis

Thailand: Annual decrease of 22.2% and at war with its neighbor, and chaos in its streets

Brazil: Annual decrease of 13.6% and on the precipice of significant currency devaluation

Mexico: Annual decrease of 10.3% and experiencing a massive drug war

So which countries are next? Based on the latest first quarter figures it appears that Sweden (-9.3), Chile (-8.3%), Germany (-8.2%), Hong Kong (-7.8%), Italy (-7.5), and Denmark (-7.3) are the prime candidates. To put this in perspective, we called for a major blow up in Latin America, and right on cue, Brazil and Mexico are leading the way, with Mexico the first recipient of the new “new” loans with no strings offered by the IMF. But what is more dangerous is that a very unstable Chile is sneaking up, and if they default, the dominoes will quickly fall. Argentina? Is a distraction to the Main Event. Germany is the largest economy in Europe, so when she goes into Depression, and we think she will, you can expect that all of her trading partners will get slammed. And for those holding out hope that China will save us, one need only look to Hong Kong to see how quickly China’s tiny little economy can turn hope into despair.

Oh, you don’t have to be in a Depression to compete for the Who’s got it worse award, however. The following countries would have outright collapsed if the IMF had not bailed them out[3] as indicated:

Romania ~$17 billion representing 7% of GDP

Ukraine ~$16 billion (8% GDP)

Hungary ~$15 billion (11% GDP)

Iceland ~$3 billion (11% GDP)

Latvia ~$3 billion (6% GDP)

So quick, shall we all go out and buy gold? It’s a Depression! Let’s try to understand the value proposition of gold during a deflation. Everything in the world is getting cheaper, so gold should hold its value better – it’s a great store of value. Yet, gold has declined since its peak in 2008. Why would we trust a commodity that is declining during a deflation? One could argue that the world is a very unstable place, and people are demanding safety of their assets over investment return. In that case, why are short term government securities continue to rally if governments and central banks are spending massive amounts of capital with their stimulus programs, which should devalue paper currencies. The reason is people are paying off their debts, and you need cash currency to do this. But perhaps the more important reason is that short term government securities are safe AND rising in price, something gold has not done in the past year. Oh, and government securities pay interest too. Ok you say, but what if there’s a war in the Middle East. Well, does the price of oil indicate that there is going to be a war in the Middle East anytime soon? Are the prices of defense stocks spiking? Last I checked, the U.S. is pulling out of Iraq – which fortunately will save the American taxpayer a nice chunk of change. By all accounts, gold is not an excellent investment in a Depression, and that is why it has not reached new highs. And that is why we continue to expect it to fall over the coming months, perhaps spectacularly as the stock market continues to rebound.

We write this column for our readers who are interested in buying bullion. For those that have it, we commend you for protecting your investment portfolio with a diversified asset not correlated with the stock market. For those of our readers that are thinking about purchasing, we’d urge you to wait. And we have been urging you to wait for awhile. As we continue to cover the important story of the spreading growth of the global Depression, we will see first hand what happens to gold prices. Our prediction: Gold will fall at least 33% from current levels with much more downside potential.

Please accept our apologies for not publishing as often as before. We simply did not have anything more to say about the market. We know this is not good for the economics of our business – when we stop publishing, people stop reading. We promise we’ll have more to say this summer, and we thank you for your patience and continued loyalty and interest in our work.

Posted on March 30th, 2010 under Current • Tags: Depression, Gold, Gold Bullion Availability, Gold Report. • RSS 2.0 feed • Leave a response, or trackback