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Inflation vs Deflation, The Winner is Gold?

Commodities / Gold and Silver 2010 Jun 18, 2010 - 01:44 PM GMT

By: Q1_Publishing

Commodities

Best Financial Markets Analysis ArticleThe latest Consumer Price Index (CPI)reading  will go a long way to ensuring most people miss out on the gold run.

The CPI came in at a very deflationary negative 0.2% for the month. Even the core CPI, which excludes food and energy prices, was a no-inflation-here low of 0.1%.


Deflation is clearly winning out. And since gold is still commonly viewed as a protection against inflation, most investors aren’t interested in gold. But in the ongoing battle between natural deflationary forces of a crumbling credit bubble and the Fed’s inflationary policies, gold will be the big winner either way.

More than Just a Safe Haven

As gold sets new high after new high, many major news outlets are trying to figure out why.

Thestreet.com reported, “Investors fled into gold as a safe-haven asset.”

Forbes just reported, “Investors look for safety in the precious metal.”

Reuters surmised investors are buying gold “as a haven from sovereign and financial risk.”

OK, so the mainstream is pretty convinced gold’s “safe haven” status is what’s been driving it.

It makes no sense. What are the investors afraid of?

Stocks – they’re up today and back on the rebound. They appear to be rangebound and it’s going to take an all-out recovery or an absolute crisis to drive them out of that range.

Bonds – treasury bonds have been bid up so high yields are unsustainably low (side note: creating an opportunity even safer and potentially more profitable than gold – click here to get full report). High quality corporate bonds yield between 5% and 6%. Even beleaguered BP should be able to float $5 billion in new bonds at a reasonable rate although it’s facing an unknown liability that will eventually rival those of the tobacco industry and asbestos manufacturers.

The devaluation of U.S. dollar – the dollar index is actually up 15% this year.

Gold as a safe haven…not a chance.

What’s really driving gold is not safe haven buying, but deflation.

Inflation vs. Deflation: The Winner is Gold

Despite the best money-printing efforts of governments around the world, deflation continues to win big. Simply inflating the debt burdens of the private and public sectors has not worked at all. And despite ongoing efforts including near-zero rates and public announcements of debt monetization, deflation will likely continue to win out for the foreseeable future.

Of course, all the deflation fighting measures will lead to massive inflation eventually, that day is a long, long time away. In the interim, it’s great news for gold.

As we continue to focus on, the fundamentals driving gold are interest rates. Low interest rates always create asset bubbles. And with stocks and housing bubbles already created and burst, this time around, that asset bubble will be in gold and real assets.

The reason is because gold has become one of the few “trusted” assets in the world. In the great sell-off of 2008, gold was a top-performer. Gold has led the way as stocks in general rebounded since March 2009 too. Gold is starting to get a lot of attention, but it’s just the beginning.

Stocks are too expensive. Bond values will get destroyed when interest rates rise. Bank CDs and savings accounts yield next to nothing.

All that’s glittering is gold and quickly becoming the only asset class worth buying.

Once gold is no longer viewed by the masses as a safe haven and as just another asset class to make some money, we’ll see considerably more interest.

The driving forces of fear and greed are very powerful. As gold prices march higher, both emotions will act in tandem to drive gold prices even higher. And don’t worry about money supply, the cash will be there to bid up gold prices for years to come.

The Fed wants a bubble and politicians need a bubble. And they’ve proven their willingness to keep interest rates low enough and the money spigot wide open to fuel one of the biggest bubbles in history.

Remember, the Fed responses to the currency crisis and Russian debt default in the late 90s led to the tech bubble. The response to that tech bubble unwinding and 9/11, which was even bigger, created the larger and more widespread housing bubble. This time around, with the greatest Fed action ever, should result in an even bigger bubble then them all. And all signs point to that bubble being in gold and real assets.

When It Will All be Over

Now, with gold setting new highs, we’d like to remind everyone that this will not last forever. Eventually, a gold bubble will form and completely implode. It will not be different this time. But that’s probably at least a decade away. Here’s why.

The Fed and other central banks have shown their willingness to keep interest rates low for as long as it takes. If history is any evidence, it will take double-digit interest rates to pop the gold bubble. If the Fed started raising rates at quarter point starting next year, it wouldn’t be until 2016 when they’re high enough to have a significant impact on the cheap-money fueled gold rally.

Of course, we realize gold just set another new all-time high. And no one wants to be the greatest fool who buys at the exact top.

To that we remember the sage advice of Jesse Livermore in Reminiscences of a Stock Operator:

“New highs are very important for timing.  A new all-time high can mean that the stock has broken through the overhead supply of stock and the line of least resistance will be strongly upward.  Many people, when they see that a stock has made a new high, sell it immediately, then go to look for a cheaper stock.”

The same rule can certainly be applied to gold. Most investors who have not taken the golden plunge can still find many reasons not too. Either it’s “too high” or “gold is protection against inflation” will miss out on all the run-up. We’re confident they’ll capitulate and buy gold just as it’s hitting topping out.

Get ready as the inflation vs. deflation battle continues and gold wins either way.

Buy gold, buy it consistently, and look for big opportunities in the best gold stocks.

Good investing,

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2010 Copyright Q1 Publishing - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Shelby Moore (author of "End Game, Gold Investors Destroyed")
19 Jun 10, 07:28
Negative REAL interest rates

Even if some prices are falling very slightly, we have inflation because REAL wages are declining (especially precipitously if you average wages of the employed with the zero wages of the accelerating ranks of unemployed):

http://www.marketoracle.co.uk/Article16212.html

Gold is rising because of the negative REAL interest rates in the PUBLIC (sovereign) bonds. CPI is a lagging indicator. They are negative REAL relative to PRIVATE sector (debt and bonds) interest rates which are skyrocketing (or soon to):

http://www.marketoracle.co.uk/Article20327.html

http://www.marketoracle.co.uk/Article20418.html

When the private sector implodes, there will be massive shortages and inflation, then next comes the stampede to gold+silver as the wheels fall off the fiat delusion, which is the currency event called hyper-inflation.


dincer
19 Jun 10, 16:00
Gold is not in a bubble

A BULL MARKET IS A “NATURAL EVENT” DRIVEN BY FREE MARKETS.

A BUBBLE IS AN “UNNATURAL” EVENT DRIVEN BY GOVERNMENT.

When it comes to gold, it is clear that gold is not in a bubble, because governments do not intervene in markets to make gold price higher. On the contrary, they throw everything (central bank sales, leasing, financing academic and media propaganda against gold, paper gold instruments, bribery, legal tender laws, demonetization, tying government debt and goodwill to paper currency etc.) onto it to suppress its price.

Mr. Mickey, you are right: FED wants a bubble, but not a bubble in gold. The greatest bubble ever is in front of our eyes: BOND MARKET


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