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It is now 4:30 AM on Tuesday, and gold has just topped $1,250, an all-time high (non-inflation adjusted).  That calls for a celebration!

There are only two viable scenarios now and a steady economy isn’t one of them.  Will deflation get the upper hand or will hyperinflation rule the day?  As always, Robert Prechter presents the deflation side of the argument.  (My comments follow his, in “bold”)

(Reuters) – The price of gold could drop 40 percent from its all-time high because of bearish technical momentum and deflation amid a European debt crisis, said Elliott Wave International President Robert Prechter on Monday.

Prechter said, at the Reuters <Investment Outlook Summit in New York, that recent readings of gold market psychology showed a 98 percent bullishness in the metal, the highest ever recorded for any physical commodity. (I say that what the reading really shows is the lack of confidence in fiat currencies and European and American governments.  That will get worse, not go away)

He said, however, that technical momentum was stalling for gold as the rate of increase had peaked in 2006, and that each subsequent rally since then has risen at a slower rate. (Has he checked gold lately?  Gold is up nearly $300 an ounce in the past 12 months and the mints around the world are nearly out of product to sell, the demand is so great.)

“That is not a guarantee of change but a sign that one is likely.”

In January, he had forecast that gold could drop at least 40 percent from its peak value because of deflation and over-ownership.

Asked if Prechter still expected gold to correct 40 percent, he said that extremes in technical indicators still “leave gold vulnerable to that large of a decline.” (Anything can happen, even a drop of $500 in gold, but just because it is possible doesn’t mean it will happen.   And if it does, God help anyone holding stocks or real estate.  And gold will RECOVER and be the only asset to own from the bottom, forward,).

“I still feel that gold is not going to the moon here. It’s not a market that you want to be long, just as you didn’t want to be long stock in the first quarter.” (Of course – he hasn’t been long in over a decade and has been wrong for over a decade, so why should we believe him – on gold – now?)

In addition, Prechter said investors should be out of the equity markets completely and he continued to expect U.S. stocks will fall below the March 2009 low of about 666 points on the S&P 500 index. (I agree.)

Prechter is known for forecasting a big bull market in stocks in 1982 and for getting out before the 1987 stock market crash. (Yes he did, but he has been wrong about gold for the past 10 years.)

On Monday, gold rallied above $1,240 an ounce on safe-haven play as funds piled in for safety because of ongoing fears about euro-zone credit contagion. Gold is now less than $10 below its record of $1,248.95 set on May 14. (Oh really – so gold is rising as everything else is falling and that is construed as a negative?)

“I think that gold is biding its time. It’s real money, and I think there is a place for it in our portfolios.” (Well, what do ya know?  An admission that gold is “real money.”)

“In terms of timing, the time to get excited about gold was back in 2001 when no one wanted it, and now everyone seems to want it, so I don’t.” (Everyone? Has he talked to people at a cocktail party or has he tried to sell gold the money managers?)

But, what if he correct?  It is possible.  But even in his scenario he says gold is real money and there is a place for it in your portfolio.  I think it is far more likely that the major governments of the world will fight deflation with more bailouts and more money creation.  The result will be a rush out of paper currencies into precious metals, and it has already started.  That leaves us with a sinking economy, and rising prices as the value of money is reduced.  Think of a situation where there are no new jobs to be had but the cost of gas and food is rising rapidly.

The latest from John Williams (<www.shadowstats.com)

– 5.9% M3 Annual Decline Deepest Since Early-1930s Banking Crisis.
– Post-World War II Record Drop in Inflation-Adjusted M3 Signals Intensifying Business Contraction.
– Renewed Recession Will Set Stage for U.S. Solvency Crisis and Severe Inflation Threat.