Inflation vs Deflation Redux

The DOW is up 210 at 8,250, the NAS is up 45 at 1,429 and gold has followed up $20.60 to $822.60.  These are interesting numbers considering the bail out given to Citi(up to $360 billion) and the continuing bad news that is coming out regarding the global economy.  I am, quite frankly, surprised that gold was not taken down at least a little this morning.  One would think that in this skittish market environment there would have been at least a little profit taking after Friday’s run up in price.

As I moved around the internet reading different posts it appears there are two distinctly different camps regarding this latest move in gold.  There are those that say this is the move that will take it through $1000 and beyond and those that say this is a bear market rally in gold that will fail and take gold to the $630 level before a bottom is reached.  I don’t care which it is. If it takes off now that’s fine, if it tests the low $600′s that is just another opportunity to pick up more at lower prices.  The reality is that gold is coiling for a moonshot and if it does not happen this month it just gives you more opportunity to prepare.  You can never pick the exact bottom and you can’t pick the exact top.  The key is buying quality stocks at reasonable prices.  Do you really think that you would be upset that you bought Goldcorp at $24 instead of $18 when it is sitting at $75 in the future?  I think not.

Those that have read my earlier posts know that I have come down firmly on the inflation side in the current  inflation vs deflation debate.  All of the the signs point to massive inflation in the pipeline.  I see oil retreating, temporarily, due to the global reduction in it’s use, but that is purely an aberration.  One match in the Middle East will light that candle over night.  Property values are dropping due the implosion of the credit markets and the huge influx of fore closers introduced into the market.  It’s hard to buy a house when no one will lend you money and why buy now when it will be cheaper next month.  Food is up, insurance is up, in short necessities are up.  Soon as the monetary infusion works through the pipe, prices will rise much quicker.

What Happens During Deflation And Inflation

During deflation asset prices drop while credit and money supply shrinks.  During inflation currency and credit increase thus causing the currency to decrease in value. Assets go up in price reflecting the decrease in the value of the currency.  These statements are not opinions, they are economic facts.  On a side note today, I heard a senator comment and he definitely confirmed that things do not bode well for this country based on the hot air emanating from the capitol.  Charles “Chuckie” Schumer wants to increase the bailout money to 1.5 trillion dollars.  Can you see the dollar’s value shrinking?  He reminds me of that old saying about the ten most feared words ever.  “We’re from the government and we’re here to help you”.

Back to inflation.  I can talk till I’m blue (not as in a blue state) in the face but I think that the Fed Reserve will say it better than I ever could.  Their recently updated “adjusted monetary base chart” shows a currency increase of $650 billion since early September.  That is an increase of 450%!  “Quantitative easing” is roaring along.  Now add “Chuckie’s” $750 on to that picture and you may begin to see which direction this situation is headed.  It is not a pretty sight, and I think that once the new administration takes over they will manage to make George Busch look like a fiscal conservative.  Boy, I never thought those words would ever come out of my mouth.  And let me tell you, that is no easy task!

Silver:  Gold’s Little Brother

Now a quick word on gold and silver.  Currently the price ratio between gold an silver is 83:1.  No that is not a typo, that is the current ratio.  That is totally out of bounds and a correction will be coming soon.  The historical average is 15:1 and in the future 10:1 will not be out of line.  Silver, the poor man’s gold, is a bargain at the current price.

A one ounce silver eagle goes for just under $15.  Anyone that is looking for metals as a protection against currency devaluation or currency collapse should own physical silver.  I am not in favor of numismatics.  Rarity and beauty lose value in desperate times.  I believe that wherever you buy your metals you should pay as close to “spot” as you can. Once again, I cannot emphasize this enough, do your own due diligence and research who you are buying from.  It’s not hard to do on the internet and you should call and talk to them before purchasing.  There is a lot to consider. How long before the purchase and the shipment to you is of major concern these days.  The physical metals are getting harder and harder to get.  Silver is not as scarce as gold as of yet because many still view silver as an industrial metal subject to the ebb and flow of the business cycle.  This will change soon and silver will be seen as gold’s little brother.

I believe that the leverage in stocks will dramatically outperform the physical gold as the next leg up in the metals markets.  With this in mind I want to mention one stock that should out perform.  Pan American Silver Corp, PAAS will be a major player as this market unfolds. From it’s high in the $44 range to Friday’s closing price of $12.10 this stock has been beaten up fairly severely.  The fundamentals are sound and this company should move up as quickly as it went down once the the markets start to view gold and silver as storage vessels of value.  The time is rapidly approaching for the next leg up and this is a perfect time and price for an entry point.

Just as a disclaimer, I have owned PAAS in the past, but I don’t currently own it.  I am however looking to pick some up soon.  I like to buy a certain amount to test the waters and ease in.  That way if we do see some more down side I am able to average down and take advantage of the new opportunity.  You have to keep some capital around for the fire sales!

Till next time, good luck and good trading!

More Gold Market Analysis:

• Gold Vs. Deflation and Inflation
• Inflation, Deflation and Patience!
• Deflation/Inflation Revisited
• Whether Inflation or Deflation?
• Inflation, Deflation, Barrick and China