Deflation/Inflation Revisited

As we revisit the deflation/inflation argument it becomes clear that it is time to buy gold and gold stocks.  The evidence is irrefutable and the smart money knows  it is time to buy gold and to buy gold stocks and they are doing it on the dips.

The Dow is up 115 at 7,339, the NAS is down 2 at 1,429, the dollar is down .50 (.65%) at 86.74 and gold has slipped, down $7.50 to $921.90.  As last week ended, gold rallied through $940 and then fell back toward the end of the session.  Gold ended down for the third straight week.

What is going on here?  Gold looks to be relinking with the general equities markets in an old pattern.  If equities are up it is a sign that the markets are improving and that must be bad for gold,  so down it goes.  To put it another way we can equate it with buy equities,  sell gold and conversely sell equities, buy gold.   Old habits die hard.

The easing in gold prices appears to be a direct reaction to the unified comments that came from various G-20 summit attendees in Brighton. This past weekend’s meeting was the prelude to the formal meeting which takes place in three weeks.  The consensus reports a unified agenda to isolate and sterilize the tons of toxic assets that are choking off the global economy. The powers that be are serious and they will not let the global economy stall and nose dive into a depression.  I feel much more secure today than I did on Friday when I was afraid that the economy would continue to falter.  More printed money to buy worthless assets to get them off the bank’s books so that they can return to lending. I guess if you can always print more money, you can keep a Ponzi scheme going for ever, NOT!

Fiat Currency Explosion!

The powers that be are deathly afraid of deflation.  All of their reactions to date have been steps to counter deflation. That is why the current drumbeat out there is pounding away on deflation.  It is a natural reaction of central bankers because deflation is anathema to fiat currencies.  Fiat currencies have a built in bias towards a certain amount of inflation.  Deflation wrecks the train.  That makes a return to inflation the central banker’s top priority.

Naturally, when the sign post point toward deflation, the central banks will leave no tool in their arsenal unused. Up to this point, we have not seen anything but the front line troops in the battle.  The Fed still has biological and nuclear weapons left to use.  The monetary expansion has gone nearly straight up in the early stages of this war, but the really big steps have yet to be taken.  The next step in the escalation is the multi trillion dollar TALF lending program.  TALF is shoving a ton of inflation into the pipe line, but it is not the nuclear option.

Crank Up The Presses And Bring On Inflation!

Ben Bernanke knows that as the head of the Fed, he can nuke the economy into inflation any time that he wants to.  He brought this up in his famous 2002 speech which earned him the nickname “Helicopter Ben”.  If they want to get serious, the Fed could pay off all the mortgages in the U.S. for less money then they are printing for TARP One & Two, not to mention the money that will go into TALF. Just imagine how big a stimulus it would be to the economy if every mortgage holder had his or her mortgage money to spend every month.

The U.S. government could announce a payroll tax holiday that did not have to be paid back by simply replacing the uncollected tax revenues with newly printed money into the treasury.  I could go on and on with more examples, but I think you get the point.  They haven’t gotten desperate yet because they have other motives that do not include helping the average American.

Gold Is Not Going Down In This Environment!

The critics that are saying that deflation is here and gold is going to $250 are wrong. The exact opposite is the case and all of the sound and fury is the rumblings of the inflation that is coiling in the pipe line.  Ben Bernanke knows that inflation is growing rapidly, because he wrote the book on inflation.  One other group knows that inflation is coming and they are buying gold on every dip in the price. There is no question that the stimulus packages that have already been shoved into the pipeline will be amplified by the current financial crisis.

Warren Buffett expressed this very concern in a recent CNBC interview when he warned that we could be in for a bout of 1970s style inflation when global growth comes back on line.   I, for one, will side with Buffett who has actually accomplished things, rather than government professors who have only written about business.  Those that can do the job, do it, those that can’t, teach it!

Inflation is ramping up and it is important to take advantage of any softness in gold that this general equities rally brings.  It is time to buy gold and gold stocks.  The deflation myth will be dispelled shortly and gold and gold stocks at these cheap levels will not be around for long.

Till next time, good luck and good trading!

More Gold Market Analysis:

• Gold Vs. Deflation and Inflation
• Inflation, Deflation and Patience!
• Inflation vs Deflation Redux
• Inflation, Deflation, Barrick and China
• Whether Inflation or Deflation?

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