This past Thursday in our newsletter and The Golden Blog post we discussed our views on deflation or inflation and what lies ahead for the economy.  I still think we can enter an environment where we have both inflation and deflation in various asset classes.

For example, Greek bond holders might experience a significant loss of their capital if a default or restructuring takes place, that would be deflationary for bond holders.  If we experience a contagion effect, the financial system may have to take significant write downs, something they should have done awhile ago.  This could easily spread to insurance companies or industries that have exposure to possible financial write downs and debts defaults.  The sectors, industries and companies which have any exposure to bad debts could easily still see falling margins, economic slowdowns and falling stock prices.

If they are successful in papering this over temporarily, the financial implosion may not occur just yet because they have just kicked the can down the road one more time.   I doubt if the bailout funds will ever leave the banking sector any time soon and it will most likely stay in long term gov’t bonds, which really doesn’t help the economy grow.  So the economy could still contract as there is no real economic growth or prosperity, especially while the governments and banksters are still calling the shots.

The problem we face in the West is a deflationary life style, while we still deal with an inflationary economic environment for certain assets.  The supply and demand fundamentals for commodities still remain strong in the longer term.  With all this extra printed money, gov’t and bankers now have more currency units to buy bad asset, but they are still chasing the same number of hard assets, physical goods and resources, including human labour.

Commodities could still increase after they successfully paper over the debt problems with more debts; supply and demand fundamentals will eventually prevail.  This would be inflationary for commodities longer term since they are the basic tools and building blocks needed make any society grow.  Eastern countries don’t think in terms of short term investment cycles like western financial elite do, their time horizons are 5 to 30 years out and they have much better fundamentals going forward.  This doesn’t include Latin America and Africa which have similar fundamentals and visions of prosperity, so worldwide growth can still continue.  Some of this hot paper money will most likely flood into these emerging economies since banksters are always looking for higher yield and growth; but remember inflation is still a big concern in most developing nations.

The debt free and growing consumer in developing countries will still need basic products, services, hard assets and commodities to grow their lifestyle.  These assets and commodities will be highly demanded in the emerging world vs. sovereign debt bonds from broke governments and financial instruments created by criminal bankers.  Most cultures outside of Western world thinking usually do not trust their governments and have always held precious metals as a store of wealth for thousands of years.  Western governments may have fooled its citizens into thinking that Gold and Silver have no value in the monetary system, but I am willing to bet that the citizens of India, China, Middle East, most of Asia and parts of Latin America aren’t so easily fooled about Gold and Silver's role as a store of value.

Here is a question emailed to me by a reader on Thursday Oct 13:

Hi Vin,
Has your outlook, in regards to inflation or deflation scenario, changed with Slovakia's acceptance today of the expansion of the EFSF and talks of need to expand the fund to $2tril+ ?  It seems as though Bernanke stands ready to launch QE3 once the US economy heads into a "recession".  Thanks for the emails...you always have some great info.  

Regards,
Jason A.

Below are some of the points I made in my reply:

No, I don’t think more QE is going to do anything to these markets at the moment.
QE is only for bailing out the financial system and avoiding the collapse.  Most likely that money won’t come into public circulation and is probably being used as digital counter for bankers to keep track of who owes who what, all of which will be paid off in worthless currency units.

They have done QE 1 & 2 and there was still no benefit to the economy, it’s just more printed bail outs for financial system to avoid a collapse.  Eventually the day of reckoning is coming and how it manifests itself into the markets is yet to be seen, inflation or deflation, bullish or bearish.    I guess we have to wait until the QE announcement to see how much money is going to be digitally created and who gets the bail out/stimulus funds.  Main Street will not see one dime of this money so I don’t think it will help the overall economy, maybe a 6 month rally in the stock markets is the best we can hope for.

As for the stock markets in general, let’s keep an eye on the short term trends and see how it moves over the next few weeks.  I don’t see a need for a bullish breakout move from here, not until we officially hear about QE.  The big unknown at the moment is that we still don’t know what will be QE’d, who will get it and when will it take place.  Also we have to ask ourselves how much of this papering over and QE is already known and  priced into the markets.   Everyone knows it's coming so maybe the market has already factored some form of QE into the current pricing.  Even if QE is announced, there is no guarantee that money will get pumped into the stock markets.  A real operation twist by the Fedi, would be to pay on lip service about QE but not come thru with it right away or at least until the market really feels the pain and is beggin for it.

Just keep an open mind to all possible economic outcomes and be willing to change trading directions in the short term.  The longer term trends have been set for commodities and that can’t be change easily.  Precious metals are still in a long term bull market, but we just may have to deal with a temporary setback while the banking issues are dealt with.  If the bankers are successful in papering this over, precious metals and the gold mining companies will definitely rise in value and price if and when inflation fears start to rise again.

If we get deflation first gold will maintain its purchasing power as most other asset classes will drop much further in price and value than gold should.  I would suggest having some cash ready to buy the gold producers, especially the unhedged producing gold miners with growth in the pipeline.  They will be making a lot of cash flow with gold at $1400 and they still should outperform most other sectors like they did in the 1930’s. I think the lows are close at hand for the gold sector, but I could easily see one more down wave before we finally hit bottom.

You can always make money shorting or buying bear ETFs during a crash/deflation, so let’s wait for a clear outcome and then look at the best trading opportunities when the market direction becomes obvious.   I am only planning for this crash/deflation scenario if the banking problems become much bigger than expected and the debt issues spreads like a virus.

Longer term, what we are entering into could be very ugly either way.  Deflation or Inflation, the outcome is generally bad for the average person (99% of us). I just don’t think the banksters will be too successful papering over the debt issues in the long run.  They could get away with it in the short run, but unforeseen and bigger issues will always arise, remember we are in a financial paradigm shift so anything and everything is possible.  Look at all the possible scenarios and then develop your own strategy for each outcome based on what’s best for you.  Just make sure you have a plan, be ready to execute it and always be on the lookout for any potential Black Swans.

TTGD – S&P/TSX Global Gold Index review

As we mentioned before, inflation and deflation will still take a couple of months to play out as the Euro Debt issues are being addressed.  Until then, we can still take trading positions in our favourite gold stocks and trade them between the ranges outlined below.  Right now, with the index closing the week at 399, we are exactly in the middle of the trading range between 360 and 440.  So its though to say how things play out over the next few weeks, but the good thing is that the index has been holding up over the last few trading days and it looks like it could continue to trend higher if we get a fresh cross on the MACD and the RSI tries to move to resistance of 60.

On Oct 4th, we did come close enough to test the bottom of the range at 368.  I would definitely hold on to the positions we bought in the last few weeks because this can trend higher before reversing again.  As long as gold holds above $1650, the mining shares can slowly trend a little higher to test the next overhead resistance point.  If we get a bullish move in gold and a breakout of above $1680 that holds, then this index will move to test the overhead resistance at 420 before we take a breather.  I would suggest lightening up on your positions on any further rally from here; remember we want to be selling into strength.    I still believe we will be in a sideways trading range for awhile, so we want to be selling at the top of the range and then wait for a correction to buy back our trading positions at the bottom of the range or look for other trading opportunities.

One thing to note from the chart below is that the index is currently trading at the same price it did a year ago, so really there hasn’t been any gains in the gold mining shares compared to the price of gold.  Back in October of 2010 gold was trading at $1400 just after QE2 was announced; today it’s trading at $1650 which is a net gain of $250 in 1 year. The gold miners are still no further ahead given higher gold prices and this can not last forever, something has to give over the next few months.  Either gold will correct back to $1400 or the mining shares still have a lot of catching up to do in order to reflect Golds new price levels.  At the moment, we suggest sitting tight with long term holdings and looking for short term trading opportunities. 

Later this week, we will be updating members with trade suggestions on current positions as well as setups for new trading opportunities.

Regards,
Vin Maru, Golden Fortunes.