Gold, Dollar and Deflation

in light of gold getting smacked and the yield curve tightening, i present this from a blog...


"I'll title this question, "The Gold Conundrum"

Well, it looks as if the five year and short-term rates will cross paths in 3 months or less. I agree with you that eventually deflation will likely set in, probably soon after the yield curve inverts. Gold is presently taking it on the chin as the yield spreads tighten. I would like to use both of these themes - deflation and gold - to introduce a question to you.

In the 30's deflation, it appears that many gold mining stocks did fabulously well, not only against the broad stock market benchmarks but in absolute terms as well. Gold bugs point to this as a signal that gold stocks will appreciate if malignant deflation strikes the US. I'm not 100% convinced with this argument because it seems to me that it's based on the logic that gold is still money.It seemse that gold stocks performed well in the 30's because cash is king during bad deflations, and, offcicially Gold equalled cash during the depression. However, our currency is no longer backed by gold, meaning gold is presently less money, more commodity.

Whether we like to admit it or not, the gold standard of yesterday has been replaced by dollar standard of today. To modify a famous gold bug saying, the dollar is money. In that sense, won't the dollar be the most coveted asset of an oncoming deflation, and not gold? Deflationists like economist A. Gary Shilling and Robert Prechter do not view gold as beneficiary of malignant deflation. To my knowldege Shilling believes that a strong dollar is in the cards, and, by proxy, weak gold:

“The dollar's temporary weakness may be partly the result of U.S. interest rates that are lower than elsewhere and of a struggling U.S. economy. Yet the European Central Bank is finally lowering its rates and European economies are worse off than ours. This will close the gap as European capital comes back to the U.S. And don't forget that the dollar remains the world's main currency.Short run, the dollar should strengthen because global economic weakness abounds, and the U.S. is the best of a bad lot, particularly since most other countries rely on it as a destination for their excess goods and services.”



Shilling gets kudos for his sticking to his deflation guns over the years, but I remember that he also thought deflation would be beneficial for our economy – an idea, I imagine, that will be at odds with what reality has in store.

Prechter has similar views on gold, albeit for a different reason. It's my understanding that Prechter believes gold's value will slip along with the prices of other commodites.
Prechter has been quite wrong about the length of this bear market rally and also famously wrote that if gold were to hit $400/oz he would rethink his bearish views on the yellow metal (gold has reached his stated target, yet he's stubbornly refused to capitulate).

My instincts are quite mixed on gold during a deflation. I know the US has severe fiscal imbalances that should result in a rejection of our currency, but the rest of the world is willing to turn a blind eye as long as it experiences growth as a result of our lack of fiscal discipline. What troubles me is that the US balance sheet continues to deteriorate, and the trade deficit enlargens, but the dollar has strengthened.
Gold stocks, particularly the unhedged varity, shined from 2001-2003, during our closest scare with deflation, however, it's not clear that they directly benefited from the recessionary whirlwind that manifested itself a couple years back, or if the decline in the dollar caused their surge.Then again, maybe the two – deflation and the dollar's decline – are inseperable.

The one clue I have is that the XAU index and Thailand's SETI index seem to mirror each other, but I'm scratching my head to determine what it means."

 

Prechtor is the classic elliot wave zealot

His popular book, conquering the crash, was DEAD WRONG about what would happen in 2003-2005

rampant deflation? do things feel deflationary to you?

predicting rampant deflation, when rampant inflation is ahead, is not a minor miss

now, one could say that manipulation changed things, and perhaps it did

but people more often than not lose their butts when they follow Prechtor

you'd think a guy whos got it all figured out would get it right once in a while

 

i agree elliot wave is complete garbarge: if it truly was the apex of stock analysis, prechter would be buffett. however, things feel like they are about to be quite deflationary. overleveraged consumers are like a deflationary powder keg for the next slowdown, and the yield curve should invert shortly.

 

i'l agree with you on that, and that even a broken clock can get it right twice a day

you cannot have a complete lack of fear of debt, for a prolonged period of time, without consequences

consider that people fear the stock market, but not debt

it's purely a matter of which one has bitten recently