By Adam Brochert, GoldSeek

Gold’s getting ready to have a short-term correction if it didn’t start today. Trying to game short-term corrections in a raging bull market is a fool’s game and there’s no reason to do it. Simply buy on sharp pullbacks and hold on. It’s not rocket science for those with a time horizon of more than a few days. One simple 10 year monthly log-scale chart can tell you where the current secular bull market is:

Anyone who has studied prior secular bull markets knows that a 4 fold gain over ten years is not a bubble and is not anywhere a secular top, but “bubble” calls are everywhere in the mainstream financial community regarding Gold. First, they don’t see it coming and say it can never happen and then they call “bubble” the second it does! I love it because Gold is still climbing a wall of worry. Yes, the short-term speculative froth is a little high, but long term (I am not a day trader), Gold has a long way to go regardless of what paperbugs think.

There is too much confusion regarding Gold and its role in society. This confusion, of course, is not by accident in a paper currency regime. The deflation versus inflation debate, it seems to me, has become the democrat versus republican debate in my opinion. In other words, it is a distraction and unimportant to serious Gold investors. Those who thought a democrat (i.e. Obama) would fix our country’s structural problems and stop the senseless warfare against innocent third world nations hopefully now understand and will learn from their naive mistake.

Read more….

By Kim Kyoungwha

Oct. 28 (Bloomberg) — Gold may rise to a record $2,000 an
ounce in the next three years as investors hedge against
“massive” inflation sparked by governments printing money,
according to Superfund Financial Singapore Pte’s Aaron Smith.

“In the next few years, after the deflation cycle, we’ll
see massive inflation,” Managing Director Smith, 30, said in an
interview. “Soon, when you go to buy a cup of coffee, you’ll
pay $20 or $30 because the dollar won’t be worth anything.”

The company’s Superfund Green Gold A Fund, which has more
than doubled since its inception in 2005, has lost 15.6 percent
this year because of higher volatility, said Smith, who joined
in 2002. Gold rose to an all-time high this month as governments
including the U.S. boosted debt to combat the global recession.

“When the U.S. dollar crashes, all the paper currencies
have to crash, otherwise if their currencies are too strong,
their economies will be weak,” said Smith, who issued similar
gold forecasts in May and earlier this month. “Another
excellent buying opportunity for investors is silver.”

Gold for immediate delivery, which touched a high of
$1,070.80 an ounce on Oct. 14, traded at $1,039.32 at midday in
Singapore. The metal has strengthened 18 percent this year,
while the Dollar Index, a six-currency gauge of the dollar’s
strength, fell 6.4 percent.

Gold Forecasts

Smith joins investors including Shayne McGuire, director of
global research at the Teacher Retirement System of Texas, and
Jim Rogers in forecasting higher gold prices. Pension funds will
increase gold holdings as currencies decline, McGuire said on
Oct. 22. Gold will probably top $2,000 in the next decade as the
dollar weakens, Rogers said Oct. 7.

Superfund, founded in 1995 and backed by $1.6 billion in
assets, specializes in so-called managed futures, using its own
trading system to generate buy and sell calls on stock, bond,
currency and commodity futures. Still, the company’s flagship Superfund A, which gained 35.4 percent last year, has lost 24
percent this year, Smith said.

The ratio of silver to gold, currently at 62.35, will be
“cut in half” in the next three to five years as millions of
people in South Asia and China buy the metal as an alternative
because they can no longer afford gold, Smith said. Silver has
soared 46 percent this year to $16.65 an ounce.

Read more….

By John Mauldin, GoldSeek

What’s a Fed to do? We get talk about tightening and taking away the easy credit, but we got the fourth largest monetization on record last week. This week we examine the elements of deflation, look at some banking statistics that are not optimistic, and then I write a reply to my great friend Bill Bonner about why it’s the best of times to be young. I think you will get a few thought-provoking ideas here and there.

But before we get to the main letter, I want to recommend a book to you. I am on a 17-day, 12-city speaking tour. It is rather brutal, but I did it to myself. However, one of the upsides of traveling is that I get quiet time on airplanes to read books. I am working my way through a very large stack of books on my desk. One that caught my eye – and I’m glad it did – is a book by Tom Hayes called Jump Point: How Network Culture is Revolutionizing Business. Hayes writes about how we are getting ready to experience a cultural change every bit as profound as the Industrial Revolution. He argues that as the 3 billionth person gets online sometime in 2011, it will shift the dynamic of how we interact as businesses and consumers. We get to 5 billion by 2015. The mind boggles.

Clearly, it is already changing things, and I am not sure if I buy Hayes’ thesis that 3 billion is a magical number, though it is great marketing. That being said, I found something on almost every page that I underlined or highlighted. This book made me think about the future in ways that my kids already get but Dad doesn’t.

I like to read books about “important stuff” by people who have done a lot of thinking about their subjects, and who can write easily and fluidly and communicate their thoughts without weighing me down with unnecessary verbiage. Hayes has done that. (I am sure some of you, my patient readers, wish I could be better at that!)

Read more….

The cost of living in the US rose slower in September, easing concerns of higher inflation which over the past 12 months has fallen more than one percent, according to a Labor Department report released Thursday.

Consumer prices edged higher last month by 0.2 percent, following a 0.4 percent climb in August. Core consumer prices, which exclude volatile food and energy costs, also rose by 0.2 percent.

"Today’s figures won’t shift the argument about inflation risks at the Fed. They don’t show deflation, but nor do they show sufficient inflation pressures to make the doves want to tighten soon," Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, was quoted on Reuters.

Annual US inflation fell 1.3 percent. Core annual inflation rose 1.5% from September 2008 following the 1.4% increase in the 12 months ending in August.

(…)
Read the rest of US Annual Inflation Down 1.3%, Inflation Calculator Update (495 words)

The Daily Reckoning

Two important items in the news today:

First, Bloomberg reports that retails sales fell 2.1% in September – the biggest decrease this year.

Know what that means? It means the “Age of Thrift” is here…and that consumers really are cutting back – just like we said they would.

And it means that the consumer economy is not going to return to robust growth anytime soon. And it means, too, that people will find it hard to find jobs for a very long time.

Another thing it means is that housing prices are not likely to recover – not in our lifetimes. That was a once-a-century bubble and it has blown up.

Mortgage lenders say they expect the peak in foreclosures to come about a year from now. As for the bottom of price declines, you can expect that in 2013 or beyond. A housing bubble typically takes prices down for six years, says a study by professors Reinhart and Rogoff. But this was not a typical bubble; it was an extraordinary bubble. Seems logical that the correction will be extraordinarily deep and long too.

And it also means that this stock market rally is very vulnerable. The stock market and the economy seem to be reading different newspapers!

The Dow fell 14 points yesterday. It could begin a major drop any day. That’s why our ‘Crash Alert’ flag is flying from our London headquarters.

Yesterday, we reported the curious fact that consumer spending as a percentage of the GDP had increased. But it only increased because the other parts of the GDP – notably business spending and investment – fell off even faster.

With output falling…sales falling…and investment (in new plant and equipment) falling even faster…who’s going to hire new workers? Not many companies. And which companies are going to invest in young workers…who will have to be trained – sometimes over a period of many years – before they are really productive? Not many.

It’s the “Lost Generation,” says BusinessWeek. Unemployment nationwide is officially 9.8%. But for young people the rate is nearly twice that level – at 18%.

Their elders aren’t doing so well either.

“Baby boomers working longer hours, for less,” says a Financial Times headline. What do you expect? Their currency is going down in value. Their customers are disappearing. Their retirement savings disappeared with housing prices. They can’t even borrow money anymore.

David Rosenberg:

“Now that lenders have started to respond to their record-high delinquency rates by rationing credit, a mad scramble for cash is occurring to replace the loans – food stamp usage is up 22% year-over-year, pawn shop business is up nearly 40%, and there is a tidal wave of applications for Social Security disability benefits that are not explained alone by workplace mishaps.”

Boomers have no choice. They need money. So they work harder, and longer. And they get paid less. Why? Because prices are falling. Even the price of labor. It’s a deflationary world.

Meanwhile, The New York Times reports, “China consolidates its lead in global trade.”

This headline is a little like the announcement that consumer spending is a bigger part of the economy. It might lead you to think that global trade is growing – or, at least that the Chinese part of global trade is growing. Not at all! Global trade is still shrinking. Chinese exports too. It’s just that China’s part of the global marketplace is increasing…because America and Europe are losing market share. China is gaining market share because it competes on price. And price competition is what is driving this market.

No discount? No sale!

Power and wealth are shifting east. No doubt about it. The Chinese took over the Hummer this week. And they are even building a ‘big plane’ – the C919 – to compete against Boeing and Airbus.

Is there any business they can’t compete in? We don’t know…but we’re counting on them to stay out of financial publishing at least until we retire!

The other big news is that gold has reached a new high. It rose yesterday to $1065 yesterday – an increase of $7.

“Why so high…so fast?” That was the question in our Daily Reckoning analyst meeting this morning.

“In the last big boom in gold – in the late ’70s – gold followed inflation…and the central bank. Investors saw inflation increasing. And they saw the central bank failing to react fast enough. They bought gold to protect themselves.

“But now…there is no inflation. And central banks are alert to the problem. They haven’t raised rates…but they don’t need to. There’s no need to protect against a problem that doesn’t exist. So what are investors trying to protect against?”

No one at the table had a good answer.

“They’re just looking ahead to when all that money the feds put in the system finally shows up in inflation. If you believe there’s a real recovery you might think it is coming soon…” said one analyst.

“They’re worried about a crash of the dollar…they’re just buying gold because it’s the anti-dollar…” said another.

“Maybe the Chinese are switching their reserves to gold…just like they said they would. And maybe instead of buying at below $1,000 they’re buying quietly below $1,100…” offered another.

“Gold is being re-monetized,” says MoneyWeek editor Simone Wapler. “All the world’s paper monies are losing value – and credibility. There’s a race to the bottom as they try to devalue their currencies.”

All countries are fighting for market share. In a price-sensitive world, they increase exports by cutting prices. And the fastest – sometimes, the only – way to do that is by devaluing the currency. But when one nation devalues – say, by printing extra money – other nations must devalue too in order to stay competitive.

What can they all devalue against?

“Gold is rediscovering its old role,” says Simone. “Once again, it is the way we preserve wealth and keep track of what things are worth.”

Your editor had his say too.

“Most people are buying gold only because gold is going up. Maybe they realize that the world’s financial system is in a period of crisis. They see the central banks are being derelict in their duty. Instead of protecting the value of their paper money the bankers are intentionally undermining it. They figure that if the central banks aren’t doing their jobs – that is, if they aren’t maintaining a reserve of real money – they’ll have to do it themselves. Each person now needs to be his own central bank, with his own reserve of real wealth – gold.

“Or maybe investors don’t see that all. Maybe they just see the price going up and they want to hitch a ride. What else can they buy that has been going up for the last 10 years? Gold is up $150 – about 17% – in the last 6 months. It’s up 27% in the last year. It’s up 300% since 1999.”

Gold is in a bull market. How far it will go and how long it takes it to get where it is going, no one knows. No one knows, either, how many scrapes and setbacks it will suffer before it finally reaches its destination.

But it is a bull market. And you don’t ask questions in a bull market. You get on board and ride it to the end.

Then, you wished you had asked some questions.

Until tomorrow,

Bill Bonner
The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Boomers Have Their Backs Against the Wall

More articles from The Daily Reckoning….

The Daily Reckoning

“It was at Rome, on the 15th of October, 1764, as I sat musing amidst the ruins of the Capitol, while the barefooted friars were singing vespers in the Temple of Jupiter, that the idea of writing the decline and fall of the city first started to my mind.”
– Edward Gibbon

Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.

“We are short the United States of America,” we announced from the comfort and safety of our headquarters in London. “Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything.”

What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world’s largest economy, we decided to sell the whole damned thing.

All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the ’50s. And the economy is in the worse recession since WWII.

Meanwhile, Americans’ per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too…from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.

Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.

So you see, we were right; America was a sell two years ago.

And now it is the dollar that is falling. It’s gone down 12% in the last six months – a huge move for a major currency.

“Asia tries to slow dollar fall,” is the lead story in today’s Financial Times.

Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago, you could have gotten a euro for less than a single dollar. A falling dollar makes imports more expensive, say analysts…raising the cost of living in the homeland. But you wouldn’t know it from walking around on the streets of Miami or Las Vegas. You can get a house at 50% off its price three years ago. As for the breakfast special – for less than 3 euros you can get enough food to kill a Pakistani.

By European standards, America is cheap.

“Europeans again interested in Florida houses,” says a headline in The New York Times.

House prices are down 30% to 50%. The dollar is down about a third too. That makes the United States a bargain.

But is the United States of America about to become even cheaper?

One thing we were wrong about when we issued our ‘sell America’ call two years ago was US debt. Treasury bonds have resisted the general downward trend of things with the stars and stripes on them. Bonds have not gone down; they’ve gone up.

Private households are buying them for their retirements. Banks are buying them for risk-free profits. Speculators are buying them in anticipation of deflation.

David Rosenberg:

“The big story yesterday was the further massive $12 billion decline in outstanding consumer debt in August – the consensus was looking for an $8 billion contraction. This was the seventh month of debt retrenchment in a row. In other words, the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend.

“Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending.”

Americans are saving. And they’re buying US Treasury bonds. (More below…) But how safe is their money? Is it a good idea to buy US debt now?

On Wednesday, Latvia tried to raise a trivial amount of money. It offered $17 million worth of 6-month bonds. How likely is it that Latvia will default before Easter? We don’t know, but investors judged it not worth the risk. Not only did the bond auction failed, it failed with no bids.

That’s what happens when lenders lose faith in a government. They refuse to lend it money – except at high rates of interest. But the high rates of interest work like a noose on the neck of a cattle rustler. They block the vital flow of oxygen – not to mention breaking his neck.

Note that the US federal government is still functioning like an empire at the peak of its power. The Pentagon is still rustling up trouble all over the world – at a cost of trillions. US government employees are growing more numerous and richer – with twice the annual incomes of the private sector. And the Obama Administration – apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion – is considering new ways to get rid of cash.

Remarkably, investors still lend the US government money – asking only 4% annual yield on a 30-year loan. As for 91-day money, they practically give that to the feds for free; it sports only a yield of 0.066%.

This will surely be a point of puzzlement for the financial historian of the next century. It is certainly a point of puzzlement for us.

Yesterday, gold hit a new record at $1057. Doesn’t gold go up when inflation rates rise? And don’t bonds go down when inflation goes up?

So why are people buying bonds with such puny yields?

There is a lot of whispering in this market. Gold is trying to tell us something. Bonds are trying to tell us something. The dollar seems to have something on its mind too. Stocks are just babbling.

If gold is trying to signal that inflation is coming, the bond market is not paying attention. Bonds seem to be saying that it is deflation we should be worried about; but the stock market doesn’t seem to hear.

And there’s the dollar. The greenback is in the same choir with stocks and gold, as near as we can tell. They all seem to be chanting about inflation coming back.

But what if they’re all wrong?

Just look at what is going on in Washington, if you can bear it.

The feds have a budget that anticipates inflation and growth. Spending is supposed to remain flat until 2013. Tax receipts, which are no higher today than they were 10 years ago, are supposed to rise, gradually filling in the Grand Canyon of deficits. The number crunchers think we’re headed back to the Reagan years – when the tough-love policies of the Volcker Fed squeezed out inflation and created a real boom. Then, tax revenues rose 9% per year between 1984 and 1989.

How likely is that today? Not very. Instead, what is likely to unfold is a deflation story. Instead of staying flat, federal expenses are likely to rise as one failed stimulus gives way to another failed stimulus. Then, instead of going up, tax revenues will go down…digging an even grander canyon between out-go and income.

Then, or long before, there will be a panic out of bonds, the dollar, stocks – practically everything. Everything goes down!

At this point, the US will be in about the same situation as the Roman Empire as it approached retirement. Expenses kept rising. Rome had to pay the Blackwater-type military contractors of the era…in addition to keeping Roman mobs supplied with food stamps and unemployment benefits…while its tax base fell. Gradually, the empire lost the ability to defend itself.

When Edward Gibbon began his history of Rome’s decline and fall, Roman real estate had probably been in a bear market for at least 1300 years. Rome’s population fell from over a million to under 20,000. Politically, Italy had broken apart more than 1,000 years before Gibbon was born, and it wouldn’t be put back together again until nearly 100 years after he was dead.

It’s far too early to write the story of America’s decline and fall. That job will fall to some future historian, perhaps seated on the ruins of the Lincoln Memorial, wondering how people made such a mess of things.

Our guess is that he will come to the same conclusion we have: Stocks? Bonds? The dollar? Investors should have sold them all!

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

A Deflation Story

More articles from The Daily Reckoning….

The Daily Reckoning

“Gold continues to climb…stoked by inflation worries,” says a headline in the International Herald Tribune.

Yesterday, it touched a new record – $1,050 – even as the dollar rose, oil slumped under $70 and stocks dipped very slightly.

Well, what do you expect? The United States added $1 trillion to its monetary base in the last year or so. The federal government is running a deficit of $1.7 trillion this year. And along comes Barack Obama with an idea to stimulate employment – spend more money! This time, Obama’s plan is a kind of ‘Cash for Workers’ program…in which businesses get a tax credit for hiring new employees.

Gold investors must think the new program will be the straw they’ve been waiting for. Government has piled on bales of costly new initiatives on this poor camel’s back. Still, he stands up straight.

So, is gold at $1,000 a bargain…or a trap? Or both.

We begin by asking: where’s the inflation? We don’t see any inflation. What we do see is deflation.

Barclays Capital says gold could go to $1,500. We don’t know where they got that number. It could go to $15,000 for all we know. Or it could go down, too.

Our guess is that it will go down enough scare the bejesus out of speculators. Then, it will soar.

But, hey, we’re just guessing – along with everyone else.

Sooner or later gold is probably headed to the lunatic moon. We’re sticking with the yellow metal. We don’t want to miss that ride.

But when?

Ah…we’re going to stick our necks out and say “eventually.” We’re sure we’re right about this. Just don’t ask us for more precision; we have none. And what bothers us is that between eventually and now there could be a lot of time and a lot of trouble. And one trouble that could come up pretty fast is another crash in the stock market.

If the stock markets of the world take another dive…like they did last year…gold will probably go down with them. Not as much, but down nonetheless. So, if we were speculating…we’d probably be short gold and short stocks too. We’d bet against bonds too – even though we think they will probably go up in the short run. The smart, long term money – in both stocks and bonds – is probably on the short side.

Here at The Daily Reckoning, however, we never speculate – except in print. As to ideas about how the world works we have plenty. We speculate daily. As to gold, stocks and commodities, we prefer to hold onto our long-term positions.

What seems fairly sure to us is that this recovery is a fraud. It’s a mountebank and a flimflam.

And now approaches a moment of truth – earnings announcements. Stock market investors bid up shares on the theory that sales and profits would rise. Will they? We don’t think so.

We think sales are going to be disappointing…and earnings will be even worse. If so, we’ll see analysts begin to change their expectations…and announce that the results are “not as bad as expected.”

If we get a few really bad announcements – with results much worse than expected – it could sink the rally. Then again, if we’re surprised with exceptionally good reports…it could send the market in the other direction.

Good results will also cause us here at The Daily Reckoning to question our position. Maybe the economy is not sinking into a chronic depression, after all. Could we be wrong?

Ha ha…are you kidding, dear reader? Of course, we can be wrong. When we were younger we were uncertain about things. But now that we’re older, we’re not so sure.

Here is what we’re pretty sure about:

1) The credit cycle has topped out.

Americans are saving – think of the poor boomers, 10 years older but not a penny richer than they were in 1999. Stocks have gone nowhere but down in real terms. Houses hit a high in 2006…now, they’re off 30%…and still going down. Jobs? Forget it…there are already 15 million people who are unemployed and about 200,000 more every month. The job market is unlikely to recover for another 6-13 years – that is, after many of the boomers are retired! And if you are lucky enough to have a job, you’re not likely to get a raise…not with so much spare capacity in the labor market.

Under those conditions, a consumer boom is very unlikely.

2) We know that a period of credit contraction is deflationary.

Prices go down as demand falls. Buyers disappear from the malls that once knew them, while the factories that produce stuff grow dusty and quiet.

But we know the feds hate falling prices. And we know they are taking extraordinary actions to get prices to go up. So far, their efforts have been a giant flop. Prices are falling in the United States at the fastest pace since the ’50s.

Most of the feds’ efforts have been directed towards keeping the bankers fat and happy…and getting themselves a bigger share of America’s output. They took funds designed to relaunch the US economy, for example, and used them to buy themselves a big position in the auto industry, the financial industry and the insurance industry.

3) We know too, by the way they conducted themselves in those affairs, that the feds have become much more aggressive…throwing their weight around in the private sector as never before.

What we don’t know is how this affects markets in the short term. So far, consumer prices are falling, but the stock market is enjoying a bounce. It is a real, new bull market? Or just a bear market bounce? It is probably a bear market bounce…but it has been going for long enough that we have to at least consider the idea that it is a genuine bull market. That’s why the numbers from this quarter are important…they’ll tell us if the companies themselves are expanding earnings fast enough to justify investors’ optimism.

4) We know too that there is a whole lot of ’flation going on.

We are just unable to tell you what kind of ’flation it is. The monetary base is way up – it increased by $1 trillion in the last 12 months. But the money-in-circulation has barely budged. The feds give the banks overnight loans at practically zero interest. Then, the banks lend it back to the feds at nearly 4% more.

What happens to it then? Well, what do you think…it is wasted on typical federal government scams and humbugs.

So, relatively little of the money actually ends up in the consumer economy. And so, we can’t tell you whether the ’flation will have a ‘in’ prefix or a ‘de’ prefix. They’re just two letters. But they will make a whole alphabet of difference to the economy and to your investments.

5) Most important, we are dead sure that the people running America’s financial policies are jackasses.

We say that with all due respect, which is probably not much. They have only one idea – and it is a bad one. They think economies are improved by more consumer spending. They don’t seem to care why consumers occasionally cut back on their spending. All that matters to them is finding ways to get the consumer shopping again. So they try tax cuts and government spending…bailouts and boondoggles…zero interest lending and federal takeovers…cash for clunkers, cash for houses, cash for employees….

…trillions worth of claptrap and folderol. But what a nuisance! The fool consumer still won’t shop!

But they’re determined to keep trying. That’s why we can be pretty sure that, eventually, they’ll get inflation rates up. One way or another. And then, gold at $1000 will seem like an outrageous bargain.

Until tomorrow,

Bill Bonner
The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Gold Touches a New Record

More articles from The Daily Reckoning….

Melinda Peer
10.06.09, 05:30 PM EDT

Gold set a new record, and analysts expect it to set a few more as the dollar falters.

Read more….

Rolfe Winkler, CFA submits:

Read more »

The Daily Reckoning

On one hand, the deflationists are claiming that given the extremely high debt levels in the West, further inflation is impossible. On the other side of the argument, many proponents of inflation are calling for Zimbabwe style hyperinflation. In this business, everyone is entitled to their opinion; however it is my contention that we will get neither deflation nor hyperinflation. If my assessment is correct, once business activity picks up, our world will have to deal with high inflation.

Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena
for The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets. Follow the Daily Reckoning on Twitter.

Inflation is Our Future

More articles from The Daily Reckoning….