Deflation: Great for Gold
Todd Stein & Steven McIntyre
For purposes of this discussion, let's define inflation/deflation in terms of rising/falling prices rather than a higher/lower money supply. Many of our fellow bears recognize that a crisis is coming, but no one seems to agree on whether it will look like the inflationary 1970s or the deflationary 1930s. Both camps have good arguments. Those who predict inflation point to a reckless Federal Reserve and compare our situation to Argentina or Weimar Germany. Those who see America approaching the tipping point of deflation/contraction take a look at the amount of credit outstanding in the world and correctly observe that it takes more and more debt to produce the same amount of GDP - "pushing on a string" if you will. Finally there is a third camp that seems to think that we will have inflation in commodities while at the same time deflation in financial assets.
Prechter is clearly in the second camp and suggests investing in "cash" despite the Dollar's shaky fundamentals. He correctly shows how holding cash during a period of falling prices creates amazing investment opportunities once the bear market has wreaked its havoc. His book goes through every investment class and tells how it performed during the Great Depression. Stocks, corporate bonds, real estate, collectables and commodities are all categorized as investments that did not perform well in the 1930s and should therefore suffer dearly in the upcoming crisis. The only investments that shined during the Depression were cash and cash equivalents such as gold. (Because at the time, the US Dollar was fixed to gold) However today, since there is no official link to the US Dollar, gold is lumped into the "commodities" category and deflationists will tell you to avoid owning shares in mining companies like the plague.
of gold (and silver) into the "commodities" category
is where we believe the deflationists' flaw lies. Precther and his deflationist
brethren should understand that unlike the 1930s when the US
Dollar was literally as good as gold, the greenback today is
nothing more than an IOU backed by the full faith and credit
of our government. Their suggestion to hold cash during the upcoming
crisis is wise, except we believe the correct form of cash to
hold is gold and silver, not dollars.
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