mick silver
18th October 2010, 04:08 PM
http://www.321gold.com/editorials/schwensen/schwensen101510.html ... Troy Schwensen
Oct 15, 2010
As the Dow Jones breaks 11,000 and commodity prices surge higher, many deflationists have been left with that familiar sinking feeling as the US dollar resumes its fall and their large cash positions, from an opportunity cost perspective, begin to look questionable. Given the present circumstances, central banks are left with one of two choices:
Let deflationary forces win the day to the short and intermediate term detriment of the economy, financial markets and their political constituents.
Print more money and buy assets in an attempt to prevent deflationary forces and risk the inevitable inflation these actions will create.
Deflationists believe this ongoing game of tag team between the US Government and the Federal Reserve has reached its conclusion and that the US dollar is the safest place to be. They see large carry trade positions unwinding as debt, denominated in US dollars and Japanese Yen, will have to be re-paid forcing both currencies substantially higher (deleveraging). We briefly saw strong evidence of this occurring in 2008 and early 2009 before intervention reversed the trend.
Inflationists believe this fall in the US dollar is very much by design. They maintain that the Federal Reserve and the US Government have both the arsenal and the will power to ensure this devaluation game continues. With both government and private debt levels now at unimaginable levels, they think this has quite literally become a game of “kick the can down the road”. The major rule in this game is there are no rules, hence the longevity.
In summary, deflationists think we have reached the end of the road. Inflationists believe the road is long and we have further to travel. The evidence is again leaning in favor of the inflationists. I use the word “again” because many deflationists have been predicting the end of the road since 2001. All theories inevitably have to stand up to what actually occurs. The Federal Reserve has recently intimated more QE in an attempt to squash any prevailing deflationary forces. Even recent talk of more of the same has seen a predictable rally in just about everything. That is at least in nominal terms.
I would now like to share with you three charts which suggest we are very much approaching the cross roads in this inflationary verse deflationary arm wrestle. The first is a chart of the Dow Jones index. The second chart looks at the silver price and the third is a chart of Australia’s major gold miner Newcrest Mining. All three compare the performance of the index, commodity or security in question with the price of gold. As a rule, when deflationary forces take hold, the gold price tends to outperform. When inflationary forces return and the markets are awash with liquidity, gold tends to either hold its ground or underperform against the three items in question.
Dow Jones v Gold
click on link to read all
Oct 15, 2010
As the Dow Jones breaks 11,000 and commodity prices surge higher, many deflationists have been left with that familiar sinking feeling as the US dollar resumes its fall and their large cash positions, from an opportunity cost perspective, begin to look questionable. Given the present circumstances, central banks are left with one of two choices:
Let deflationary forces win the day to the short and intermediate term detriment of the economy, financial markets and their political constituents.
Print more money and buy assets in an attempt to prevent deflationary forces and risk the inevitable inflation these actions will create.
Deflationists believe this ongoing game of tag team between the US Government and the Federal Reserve has reached its conclusion and that the US dollar is the safest place to be. They see large carry trade positions unwinding as debt, denominated in US dollars and Japanese Yen, will have to be re-paid forcing both currencies substantially higher (deleveraging). We briefly saw strong evidence of this occurring in 2008 and early 2009 before intervention reversed the trend.
Inflationists believe this fall in the US dollar is very much by design. They maintain that the Federal Reserve and the US Government have both the arsenal and the will power to ensure this devaluation game continues. With both government and private debt levels now at unimaginable levels, they think this has quite literally become a game of “kick the can down the road”. The major rule in this game is there are no rules, hence the longevity.
In summary, deflationists think we have reached the end of the road. Inflationists believe the road is long and we have further to travel. The evidence is again leaning in favor of the inflationists. I use the word “again” because many deflationists have been predicting the end of the road since 2001. All theories inevitably have to stand up to what actually occurs. The Federal Reserve has recently intimated more QE in an attempt to squash any prevailing deflationary forces. Even recent talk of more of the same has seen a predictable rally in just about everything. That is at least in nominal terms.
I would now like to share with you three charts which suggest we are very much approaching the cross roads in this inflationary verse deflationary arm wrestle. The first is a chart of the Dow Jones index. The second chart looks at the silver price and the third is a chart of Australia’s major gold miner Newcrest Mining. All three compare the performance of the index, commodity or security in question with the price of gold. As a rule, when deflationary forces take hold, the gold price tends to outperform. When inflationary forces return and the markets are awash with liquidity, gold tends to either hold its ground or underperform against the three items in question.
Dow Jones v Gold
click on link to read all