Up until lately I’ve been a goldbug.

But I can now see enough of a case for the deflationary scenario that I’m open to changing my opinion. By discussing the deflationary possibility, we’re in effect indirectly discussing gold’s future price, so let’s look at some evidence:

In decades past, banks were only too happy to loan money for the purchase of assets that everybody was convinced was going to continue to increase in value. Housing and commercial real estate are the first good examples that come to mind. IOW, banks have always been willing to lend money in an inflationary atmosphere. By the same token, a bank would have considered it ludicrous to loan money to an investor who wanted to use it to purchase any asset that was likely to decrease in value. IOW, banks were reticent to loan money if they perceived that the atmosphere was deflationary.

What are we seeing from the central banks today? An outright refusal to loan money… to anybody, even each other. If the FED had any intention of spurring the economy into activity they’d be loaning out that freshly printed FED seed money into the economy so that it would multiply its own volume by the magic of the fractional reserve banking mechanism. That would be inflationary. We are seeing no such thing.

Instead, what I think we are seeing is a hoarding of that cash in preparation for what the FED knows is coming down the pipe… a massive surge in demand for the American dollar. In other words… the FED is expecting a deflationary scenario and they’re setting up all the friends of the FED with cash. When the value of all things has crashed, who will come swooping in to buy gorgeous American properties for pennies on the dollar? Those who have the cash, that’s who. To my way of thinking, this is compelling evidence of the trap that the FED is setting.

Why did the IMF recently sell 403 tons of gold? For all the reasons stated above. Why did India buy 200 tons of it? Two possible reasons I can think of. First, maybe they aren’t privy to the FED’s plans, and second, Indians and Chinese think and invest in much longer time frames than we westerners do. Ultimately, the Indians will have been right to have purchased that gold, but not in the short term.

I guess we have to suspend our beliefs about inflation for a second and consider that maybe there is such a thing as “down”. Most people my age, who for decades and decades have experienced nothing but inflation have become so accustomed to it that we wrongly believe that “down” (as in prices) doesn’t exist. Down does exist.

For a little more evidence of that, let’s revisit what happened only a month ago in Dubai. Does anybody remember what happened, and how fast it happened? The reaction was instantaneous. If you believe that the Dubai incident was the last time that we’re ever going to see… ever again… any possibility of a major default, then you’re probably right about the inflationary scenario. I for one, don’t believe that. A quick look at Greece’s stock market shows that “down” does indeed exist. So does “down fast” exist. Here’s a chart that shows that picture pretty darned clearly. The Greek stock market is shown in a purple line. The Nasdaq is shown in candlesticks. It paints a pretty shocking picture, but one that we must all consider:

http://stockcharts.com/h-sc/ui?s=$NDX&p=D&yr=0&mn=10&dy=0&id=p50212600793&a=184543451

Any further default, by any major entity, any small country, is going to set off another Dubai. And why should we believe that every single time a default is going to occur, somebody’s daddy will swoop in to pay the debts for another month? The next default may not have a superman at the ready. Superman himself is getting a little light in the pocketbook.

I’m not proposing that I know what’s going to happen, but I sure can see evidence that sways my thinking toward a deflationary scenario. If it does evolve that way, I’m also not suggesting it would last all that long, but undoubtedly a lot longer than most of us would consider possible. It would be short, sharp, horrendous, scary as hell and destructive beyond description to all those who owe money. That includes the American government, the greatest ower in the solar system. Unfortunately, that’s the American people. Who benefits from such a sharp but short lived nasty event? Anybody who’s been hoarding cash, or cash equivalents. And you know who that is, don’t ya! Recently, banks have been buying treasuries rather than loaning that money out to the economy. So they’ve in essence been hoarding cash and cash equivalents. It’s the banks who stand to gain from deflation, and in my opinion, they’re in the process of setting the table very nicely for themselves at this very moment in time.

So I’m no longer as convinced about the bullish case for gold. The deflationary forces could be so great as to outweigh any major flight to gold that might come about due to the fear factor. At the end of it all though, the inflationary forces should kick in like we’ve never seen before, as the USD finally resumes it’s path to ultimate destruction.

In my opinion, there’s lots of compelling evidence that suggests that all of us should consider the evidence that points toward a temporary deflationary scenario, and the logic of it. If you’re long stocks, it’s certainly in your best interest to give it some serious thought.

Merry Christmas to all !

- Northern Dancer

Related Posts:

• Congress Uneasy About Commercial Real Estate
• The “new” bubble can’t be inflated very much before it’s going to blow again.
• DXY now rests at its 200 day exponential moving average.
• How Are The Governments To Finance Themselves?
• Central banks are to expand their gold reserves for the first time in two decades, it is estimated.

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