-- Posted Tuesday, 6 January 2009 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, January 6, 2009
“Phenomenally accurate forecasts”
With the global economy caught in a deflationary vise, I queried Bob Prechter recently about gold’s prospects. He is the right guy to ask for two reasons. First, his 2002 book At the Crest of the Tidal Wave established him as the foremost expert in the world on the subject of deflation. And second, as someone who has been relative tepid toward gold, perhaps he can explain why bullion quotes have not been hitting new highs even though fiscal and monetary policy in the U.S. and elsewhere have turned recklessly expansive.
Below is my letter to him, followed by his response:
“I am writing to ask your opinion about a key question that divides inflationists and deflationists. To wit: If we are indeed headed into a deflationary depression, why has gold quadrupled off its lows, and why does it look like it’s consolidating for a push above $1000?
“I am a deflationist myself – a hard-core one, in part because of your pellucid writing on the topic in At the Crest. Other books that influenced me were C.V. Meyers’ The Coming Deflation (1977) and Davidson & Rees-Mogg’s The Great Reckoning (early 1990s). I have written myself on the topic (and inevitability) of deflation in Barron’s, as well as in the column I freelanced for several years to the San Francisco Examiner in the late 1990s. I continue to write regularly about the tightening deflationary noose in my daily newsletter, Rick’s Picks, and I see the economy as headed into a morass even deeper than the one the nation experienced in the 1930s.
‘Puny’ $8.5 Trillion
“I have been arguing that the so-far $8.5 trillion bailout is a puny number compared to the deflationary implosion of a credit edifice with a notional value in the hundreds of trillions of dollars. I also bring money velocity into the argument, since, as long as velocity is falling (for reasons related to mass psychology), the supposedly high-powered monetary base is just “dead” money that will go unmultiplied.
“In dismissing the arguments of inflationists, I like to say, ‘Wake me when I can sell my home for a quadrillion dollars.’ I toss out their useless money supply metrics and focus on deflation’s most pernicious symptom: an increase in the real burden of debt; for, as long as debt is becoming more burdensome, we are experiencing a deflation that everyone can recognize. Also, although I see a hyperinflation somewhere down the road via the mechanism of the Treasurys market, I don’t think it will come soon enough to bail out debtors. Piecemeal bailouts will not trigger hyperinflation, in my estimation; rather, it will require a deliberate decision by the government to hyperinflate by assuming, and then discharging, all debts, public and private.
Gold Will Outperform
“But what about gold? I ask because you are famously bearish on the stuff, and because you have written so cogently about deflation. Many of my subscribers are gold bugs, and I told them that I would query you about the seeming anomaly of $900 gold in the midst of a deflationary collapse. I have also told them that even if Gold prices are about to plunge, Gold is likely to outperform all other classes of investables.”
Here is Bob’s reply:
“Your own arguments are excellent. A few other remarks:
“I should not be famously bearish on gold. I have said that gold will do better than most commodities but not as well as cash. I also have said, own some gold anyway. The bear part comes in because I have left open the possibility that it can still get to $200/oz. No one else thinks it’s possible. But we have also said all along that once its fifth wave ended oil would fall back to $10. Isn’t it interesting that no one argues for oil, platinum, silver, etc? It’s because gold is the only thing that didn’t crash. But to repeat, this is exactly how I have expected gold to behave on a relative basis. It’s not making anyone rich.
“You don’t have to answer why gold quadrupled off its lows. That happened in the wave 5 commodity boom during the wave b credit inflation. A better question is why gold did so poorly relative to most other commodities, which went up way more (14 times in oil for instance). Another question is why silver lagged its 1980 so badly. The inflationists can’t answer these questions except to keep insisting that $200 silver is coming.
“Another question is how come gold is unchanged after 29 years of inflation?” [Signed, Bob]
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 6 January 2009 | Digg This Article | Source: GoldSeek.com
