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Profiting From This “Deflationary” Interlude: Are Gold and Silver The Miner's Canary?



-- Posted Friday, 1 September 2006 | Digg This ArticleDigg It!

DEEPCASTER LLC

www.deepcaster.com

DEEPCASTER FORTRESS ASSETS LETTER

Wealth Preservation         Wealth Enhancement

Financial and Geopolitical Intelligence

  

            Deepcaster laid out its forecast for a three-stage scenario for the economy and the markets in its August Letter posted July 28, 2006 entitled "Profiting From The Threatening Deflation-to-Stagflation Scenario."

 

First, we indicated that the economy would move into a "deflationary" stage with a drop in real asset prices.  We indicated that this would affect particularly the precious metals and strategic commodities such as crude oil.  This “deflationary” stage is now in progress.

 

After that initial stage we indicated the economy would likely move into stagflation.  That is to say, in that stage (arriving in a few months) the economy would be stagnant but would be accompanied by substantial inflation in the prices of financial as well as real tangible assets such as the strategic commodities and crude oil and the precious metals.

 

The beginning of this stagflationary period should provide a significant profit opportunity for Deepcaster readers and others who are aware of its beginning.  There will be three primary causes for that inflation surge.  Increasing demand from China, India and other developing nations will continue to juice rapidly increasing commodities prices.  And the Fed's continued profligate printing of fiat currency and issuance of Treasury Securities will reduce the purchasing power of the dollar.  Third, Congress' and the Administration's rampant spending and consequent government debt increases coupled with high level of consumer debt, will exacerbate the stagflationary forces.

 

We have not arrived at that stagflationary stage yet and expect not to be there for a few months.

 

As the stagflationary period matures, there is a substantial risk, but not a certainty that the economy will move into a hyperinflationary phase ending with a Kondratieff winter.  One primary cause will have been the Feds over-liquefying the economy with excess paper production in the form of fiat currency and U.S. Treasury Securities, coupled with the massive overhang of government and consumer debt.

 

            We expect stages two and three will be accompanied by the increasing repudiation of the massive overhang of consumer debt.  Government debt will be indirectly repudiated by being inflated away.  But this is all to come.  Our focus is profiting from the "deflationary" period which we now experience.

 

The Present “Deflation” - - Are Gold and Silver the Miner's Canary?

 

            In an earlier piece we indicated that we expected that at the beginning of the "deflationary" period the Fed's "Communications Policy" would be working overtime to encourage deflationary fears.

 

            So it came as no surprise to us that The Wall Street Journal just this week highlighted the fact that the purchases of luxury goods are being crushed by rising gasoline costs and housing prices and that Americans are spending less on luxury purchases.

 

            Also foreshadowing the imminent "deflationary" takedown of gold, Barrons indicated this week that gold has been "desensitized" to shocks of any kind and that now it actually moves in the opposite direction in a crisis.  Thus, it is claimed, gold may no longer serve a hedge against crisis and volatility inducing events.

 

            Deepcaster believes gold and silver ARE the ultimate hedges against inflation, deflation, volatility and crisis.  BUT Deepcaster agrees that gold (and silver) temporarily does not serve as a hedge against crisis and volatility-inducing events or as a haven from inflation, only because (and so long as) the Fed-led Cartel's price capping operation of gold and silver is effective.

 

            As those diligent readers of Deepcaster's ""Juiced Numbers II - - The Interventional Takedown - - How the Government Gets the Statistics It "Wants," Markets Get Manipulated, and Citizens Get Deluded, and Worse" piece know, the evidence is overwhelming that the Fed-led Cartel actually controls the price of gold, silver and the precious metals.  Thus any failure of gold and silver to react to geopolitical events is not reflective of the actual supply of, or demand for, gold and silver in the markets at large.  It is reflective rather of the effectiveness of the Fed-led Cartels' manipulation policy.

 

            By the way, many of the Fed's Primary dealers appear to be complicit in this price capping operation, as apparently are Major Gold Producers.  Thus, Deepcaster believes it is not an accident that Barrick Gold is underwater on its huge short position, and that, therefore, it desperately needs to be successful in its attempt to purchase Novagold and its substantial reserves.

 

A Managed "Deflation"? - - $216 Trillion Says “Yes.”

 

            Another deflationary indicator, and a genuine one, is the slowdown in the U.S. housing market.  Many astute observers have claimed (with accuracy in our view) that it will result in a slow down of the economy, cuts in jobs, and a drop in the GDP growth.

 

            Some even worry that the weakness in the housing market will be worse than the bursting of the dot-com internet bubble.  Well, that remains to be seen though we doubt it because the Fed is in the process of lowering long-term rates, doubtless with the cooperation of the BIS which as of December, 2005 had a $216 trillion interest rate contract position which could effectively serve that purpose (see “Juiced Numbers II…”).  But we do know that we are headed into a "deflationary" period.

 

            It is important to note that we put "deflationary" in hyphens because we believe that in one important respect the "deflation" is artificial.  As we outlined above, there is substantial evidence that its primary cause is the Fed-led Cartel’s market interventions.  In light of that, the apparent "deflation" in fact masks a serious underlying inflation, which we expect will become manifest in Stage Two yet to come.

 

 

How to Profit From The "Deflationary" Interlude

 

            So the question of the month is:  How does one profit in a deflationary period?

 

The answer is not hopelessly complicated.

 

Clearly deflation is not good for equities because a slow down in economic activity typically entails weakness in the equities markets.  Furthermore, a deflationary period is not good for real tangible assets because in periods of economic weakness the demand for real tangible assets either drops, or the rate of increase in demand for them decreases.

 

            So what does do well?  Well, in a deflationary period selected bonds and selected equities-of-companies-not-significantly-encumbered-with-debt-but-which-also-produce-significant-income do well.

 

Therefore, expecting the then-impending deflation, Deepcaster recommended that investors buy a certain U.S. Treasuries bond fund in its July Letter posted on June 30, 2006.  Predictably that investment has gone very profitably for those who timely took it.  We expect it to be even more profitable in the next few weeks.

 

            But as a cautionary note, we expect this ostensible "deflation" stage to last only a few months at most.  At the end of the "deflation" stage it will be time to shift out of bonds and income producing equities and back into fortress assets.

 

            Then, the price of gold, silver, crude oil and the other strategic commodities will take wing and truly fly.

 

            That launch of the Miner’s Canary will reveal gold and silver in their true light - - as the ultimate money and measure of economic value.

 

 

 

 

DEEPCASTER LLC

www.deepcaster.com

Wealth Preservation         Wealth Enhancement

Financial and Geopolitical Intelligence

 

Gravitas, Pietas, Virtus


-- Posted Friday, 1 September 2006 | Digg This Article




 



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