Gold Vs. Deflation and Inflation

November 16, 2008 Gold Stocks, Inflation, Silver Stocks No Comments

After a wild week in the general equities and the gold markets, I would like to take a breather and discuss the question of where we are headed. Some say deflation and some say inflation. Which is it? I am coming down firmly on the side of inflation. I don’t think that there is really any question whether it is deflation or inflation, but rather whether it is a manageable inflation or hyper inflation.

Deflation

First let’s look at deflation. Deflation is is a decreasing money supply and decreasing prices in goods. We are seeing neither. The Fed is pumping money into the system by the trillions, and everything that we need to buy is going up in price. Some of the things that are used as the markers of inflation are not up that much, but I don’t use the governments numbers because they always remove the markers that suggest inflation. Food is up, insurance is up, property taxes are up and gas is up. These may not be the items used by the “experts”, but these are the day to day things that I deal with. My rule of thumb is, if what I buy every month is going up, then we are experiencing inflation. I guess that’s why I am an average guy and not an “expert”.

Inflation

Inflation is an increase in the monetary supply that leads to higher prices in consumer goods. We are seeing that in spades. The Fed has been dropping money out of helicopters with no end to the drops in sight. The global central banks are committed to the same policy. At some point, this massive increase in liquidity will rear it’s ugly head as runaway inflation. By the time the central banks recognize it, it will be out of control. You have to remember that these are the same regulators that thought that the best way to stop the current financial crisis was to put the ones who were charged with avoiding the crisis in the first place, in charge of fixing the crisis that they never saw coming. It’s kind of like putting a child molester in charge of the Child Services Office.

If I say that we are experiencing inflation, you might ask why are commodities and gold going down? The answer is simple, we are experiencing asset liquidation. The markets turn down and people sell anything in order to make ends meet. The good stocks go out the window with the bad. It’s human nature, plain and simple.

Keep this in mind when we look at resource stocks, they have slid with the rest of the general stock market. What then is the difference between them and the rest of the market? Once again it is very simple. (Bear with me here, I am working on this “simple” concept.) Despite the recent slide, quality resource stocks are reporting record profits and cash flows. This is huge! What other sector of the market is doing the same? In a word, none! Some individual stocks, and I might add not many, are doing alright, but the only sector that is posting these kind of results is the resource sector. When the money that is sitting on the sidelines decides to enter the market, which sector do you think it will go to? You guessed it, the resource sector and in particular gold which is the base on which these profits are being built. Paper gold is building a bottom that will be the foundation of a substantial moonshot.

Most markets turn when the sentiment is the worst, or in the case of the dollar, the best. Suffice it to say that trends change when everyone is touting the beginning or end of trends. When “experts” tell you that markets have changed and we are entering a new era, run for the hills.

RBC Capital Markets advises selling Swiss Francs and buying dollars, this after Swiss National Bank expressed concern about the strength of the formerly invulnerable Swiss currency. “Trader surveys expect a higher dollar next week”. These statements make a statement about the market. They point to the future, but they don’t give you the date. It is important to listen to the cues that we are given. As a small trader you have to learn from every source that you can or you will be cowed into doing exactly the wrong thing at the wrong time. Now is not the time for abandoning anything gold in favor of anything paper, with the exclusion of precious metals stocks. The turning point is near and now is the time to pick up quality gold stocks while they are cheap. It is just that simple.

Till next time, good luck and good trading!