The view that we are in deflation because the money the Fed pours into the banks isn’t making its way out the door in the form of business loans seems logical. Robert Martin-Williams believes that to be the case and I urge you to read his excellent article titled Staring Into the Abyss.
But, that viewpoint assumes that inflation has to be caused by increased demand. It’s referred to as demand-driven inflation. Therefore, low demand, no inflation.
There is another viewpoint to consider – it’s called the currency-induced-cost-push inflation. That is what Jim Sinclair says will power gold up in the next two to three years. The fate of the dollar is the issue here. Sinclair says the dollar will lose its petro-dollar, reserve currency status and plunge below .72 (on the USDX). This will push up the price of our imports. “Demand” and strength of our economy will not be what pulls up prices; it will be the loss of the dollar’s purchasing power. The yuan will move front and center and will partly back their currency with gold. A new reserve currency will be implemented, and it will prominently feature the (gold backed) yuan and physical gold will be part of the new currency too.
Remember, we don’t need a strong economy to have inflation. John Williams would be the first to point out that our economy is weak and getting worse and yet he is still resolute that hyperinflation is only a year and a half down the road. This is an interesting debate – you get to choose which way you think it will go. You can embrace Jim Sinclair’s “currency-induced-cost-push-inflation,” or you can go with Martin-Williams’ “demand-pull-inflation,” which in this case will turn out to be deflation. But Martin-Williams is still pro gold in spite of the deflation, and concludes, “Rising inflation would force capital out of equities, junk bonds and government bonds (all of which are at all-time highs) and ultimately into precious metals and commodities.”
In April, a friend of mine in Miami asked me if I thought the yen would fall to 100.00. It was in the low 90s at the time. I said absolutely. As of today, the yen has fallen another 3% against the dollar to 102.195. If you think the dollar is rising, think again. The yen is (deliberately) falling and that makes the dollar LOOK like its rising. The fashionable trade is short-yen, long dollar! The Euro and the Swiss franc are holding up reasonably well – it’s all about the yen. Could it be that the Fed convinced Japan to devalue the yen to keep the dollar rising – which supports our bond market and helps to hold back gold and silver? This is not a stretch of the imagination. Imagine what will happen when this short-yen, long dollar trade reverses and the hedge funds have to sell dollars to buy yen to close out their positions. It will happen, you know.