Inflation, Deflation and Patience!

Gold struggles at the $900 mark.  The theories about inflation or deflation  abound but I would say that we need to discuss inflation, deflation and patience!

With all the hoopla over after the Super Bowl, which turned out to be a great game, it’s business as usual as the price of gold is once again taken out to the wood shed.  $900 per ounce is proving to be the the battle that I thought it would be.  We will delve further into that in a minute.  Right now, the DOW is up 32 at 7,969, the NAS is up 4 at 1,498 and gold is down $14 at $890.30 even while the dollar is down 1.15 (1.43%) at 85.033.

The battle lines were drawn around the psychological $900 figure in gold overnight.  Bullion made several moves into the sub $900 level even as the dollar declined and crude oil posted small gains.  Gold ran smack dab into strong resistance at the $930 level, just as money market funds were beginning to report a scarcity of dollars.  This is similar to the dollar shortage that led to the dollar rising 15% against the Euro in the 4th quarter 2008.  This could signal another rush into the dollar.  We will have to keep an eye on this situation and see which way it goes.

Inflation Or Deflation?

Gold Struggles With $900

For years, many have been forecasting inflation and to a lesser extent, hyper-inflation.  If we check the charts we see that the real increase in the supply of money has occurred in the last quarter of 2008.

Is This A Rhino Horn, Or What?

Monetary inflation was minimal during the first half of 2008 and during the two preceding years, which set the stage for a dollar rebound and the large price declines of assets that had been bid to high prices artificially. It takes between a year and a half and two years for the inflationary effects of  the increased money supply to work it’s way through the economy and result in higher prices.  This works the same way at the back end of the cycle.  There is a lag that would make it appear that at the beginning of the change  you are experiencing deflation when the economy is really in the  early stages of inflation, and at the end you think inflation is still roaring when you are actually in the early stages of deflation. Evidently things are not always what they appear to be.

Even though we are most certainly in the early phase of an inflationary trend, you will hear claims that we are in a deflationary cycle till way into 2010.  Gold and silver are going to be, and have been, the comodities that will buck this trend and will rise in price during this so called deflationary period.  The reason for this is clear.  Large speculators move into positions in advance of the major moves that will occur due to the change in monetary trends.  The gold and silver markets are  small compared to other markets so when institutional investors take major stakes they can turn the gold and silver markets on a dime.  It is healthy to be on the right side of their moves.  Steve Saville sums it up nicely in this morning’s post.

“In the gold market the “commercials” are generally clueless because garden-variety commodity supply/demand fundamentals, such as changes in mine supply and industrial/commercial demand, have almost no effect on gold’s price trend. Instead, gold’s price trend is determined almost totally by investment demand, which is, in turn, driven by the outlook for things such as interest rates, credit spreads, financial asset valuations, money-supply growth, inflation expectations, and exchange rates. Moreover, the people who tend to have the most foresight when it comes to macro-economic phenomena are speculators who have survived and prospered in the financial markets over a long period of time.”

The most important thing that we need to have at this time is patience. Inflation is built into the government model and it is coming no matter what the financial pundits say. Stay the course, do not be swayed by the day to day commentary and above all maintain and increase your positions in quality gold stocks.  The next couple of years are going to be very interesting to say the least.  These are the times when accumulation should be the goal.  There will be plenty of opportunity to sell and take profits in the future.

Till next time, good luck and good trading!

More Gold Market Analysis:

• Gold Vs. Deflation and Inflation
• Inflation vs Deflation Redux
• Deflation/Inflation Revisited
• Whether Inflation or Deflation?
• Inflation, Deflation, Barrick and China

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