August 08, 2011 – Early this morning, before I retired, I took a peek at the Asian markets to check out the early action in gold bullion prices and was quite surprised to see that gold had shot well past $1700. This morning I was even more surprised that not only had the price held, but London was keeping up the pace in early trade. And the Shanghai Composite Index closed down 3.7% while 10-Year Treasury yields slumped to 2.51%.

That is precisely what one should expect, of course, but I have grown accustomed to overblown reaction and not reasonable action. US debt constitutes a grossly disproportionate amount of the reserves of huge emerging Asian economies, so it is important for them to keep Treasury yields down (an therefore prices up) while they pare down their holdings and acquire hard assets. The situation in the West is vastly different, however, and the real fun begins when the US markets open their doors.

Western economies are ensnarled in a deflationary spiral. We are at the stage where lack of faith in the monetary system is so strong that no amount of government trickery will persuade the population not to deleverage. As Ludwig Von Mises said more than a half century ago, “There is no means of avoiding the final collapse of a boom brought about by such credit expansion.” But the Fed will keep trying.

One peculiar aspect of broad-based deleveraging of credit is that the resultant decline in asset prices is opposed by a temporary increase in the relative value of currency, thus creating the illusion of currency as a safe haven. So people hoard cash to ride out the storm. And when the stuff hits the fan, they panic and grab all the cash they can.

Deflation is only half of a cycle and without interference it will turn itself around. But the government’s notoriously ill-timed meddling is bound to flood the money supply at the worst possible moment, propelling the economy into hyperinflation. Overnight, all that hoarded cash will become worthless.

So it comes as no surprise that New York dragged bullion down to $1692 in the first two hours. But it is remarkable that it took less than a half hour to fully recover. It promises to be a very interesting week indeed for gold bullion.

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Jonathan Monroe

Senior Staff Writer - Gold-Bullion.org