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I have been reading many articles that state deflation is on our doorstep and inflation is no longer a concern.  Harry Dent is one of the strongest proponents of deflation.  And the Elliott Wave crown has re-surfaced.  They have logical arguments.  Should that be of concern to our readers who have large positions in precious metals?

There is one thing I continue to focus on.  It is our money supply and how the Fed will react to deflation, which implies falling asset prices – i.e. real estate, the stock market and of course the economy.  If the economy implodes, the interest on our debt will become a serious problem for the Treasury since tax receipts will fall and more bonds will have to be issued.  More than likely, the Fed will become the major buyer in this situation.  That leads to currency debasement.

Jim Sinclair maintains that this is exactly what will happen and the (hyper) inflation that will follow will not be demand driven; it will be due to currency debasement.

I discussed this with my friend Trader David R.  He is the most experienced and most talented trader of precious metals I know of.  Here is his latest reply…

 Something has to give on this chart and it’s not $5 Trillion of money supply.

XAU Monthly Chart

In other words, gold must rise because the money supply will not implode.

Japan has changed the entire dynamics of the game.  They are exporting deflation (destroying the yen to increase their exports, which will be cheaper, which is deflationary.)  That will put pressure on other Asian countries to weaken their currencies to stay competitive, which is deflationary.  Our export industries will have to cut prices as well to stay competitive.  All deflationary events.

I do not see how our stock market can thrive in this situation, or the real estate market either.  Should the stock market tank, which is not an unreasonable expectation, and with interest rates being so low, gold will become an attractive asset.  It’s all very unsettling now.  I expect things will become much clearer in the next few months.