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Is it Inflation - or is it Deflation?

By Peter Degraaf      Printer Friendly Version
Nov 3 2008 3:56PM

www.pdegraaf.com

Almost daily I receive E-mails from subscribers who worry about deflation. Here is my simple answer: “Watch what they do – not what they say!?

The above chart (courtesy Federal Reserve Bank of St. Louis), is up-to-date. It reflects a monetary increase of 305 billion dollars into the US money supply in the short space of under 2 months. Nothing like this has ever happened in the USA before! The little bumps on this chart between August 2007 and August 2008 include Bear-Sterns, Northern Rock, Lehman Bros, Fannie and Freddie and AIG, yet none of those monetary shocks compare to what the FED is doing now.

This is inflation with a capital ‘I’!

Quite often when the monetary authorities inflate the system, it takes a while before the newly created funds filter down, and before people catch on. Large numbers of people believe what the officials are saying (communications like: “we’re more worried about deflation than inflation?).

They want you to believe that ‘asset inflation’ (lower prices for stocks and commodities) translates into monetary deflation.
The two are quite different.

The current asset deflation is caused primarily by gross mistakes made by people in the banking industry. This ‘assets deflation’ continues while monetary authorities worldwide are adding to the money supply. Meanwhile fear then sets in and the decline in asset values continues till it exhausts itself.

As soon as enough people catch on to what is happening, scarce commodities, (and the stocks involved in bringing those commodities to the marketplace), will rise and rise much higher than most people anticipate.

It behooves those of us who understand what is going on, and to position ourselves to benefit from the rise to come by investing in gold, silver, oil, natgas, copper, coal, uranium and agricultural commodities. Just about anything that the government does not have the ability to produce. (Government’s specialty is cutting down trees into thin slices, adding some ink, superimposing a picture of a former ruler and adding a number, and voila their product is ready for circulation).

Featured is the weekly gold chart, courtesy (www.stockcharts.com) The call-out boxes on the chart represent the ‘net short’ gold positions of the commercial traders. The report issued October 31st showed a decrease of 162,000 from the 247,000 at the top, to the current 85,000. This is where corrections end, and the next rise begins.

Price has found support just above the 200 week moving average (rising red line), and the target for this next advance in the gold price will be a challenge at the previous high of 1,030.00 attained in March 2008.

The RSI (top of chart) is turning positive, and the MACD (bottom of chart) is very much oversold at -.32 (the most oversold since the bull market began in 2001. In order to make a profit in any investment, it makes sense to ‘buy low and sell high’. The time to buy low is at the bottom of a correction. The seasonal tendency is for gold to bottom in July – August and again in November. So here we are, just in time for the annual Christmas rally. If we are not at the exact bottom, we are no doubt very close.

Featured is the LIBOR chart, courtesy (www.stockcharts.com)

The watershed drop in assets that we saw in September and October was to a large extent fueled by the rising LIBOR rate. This rate reflects the trust or lack of trust, which banks have in so far as inter-bank lending is concerned. Near 4.6% all lending ceases. The rate is slowly returning to normal, as is the Ted Spread which opened today at 2.65 after having risen to 4.34 on Oct 15th. Investors around the world were spooked by the rising LIBOR and Ted Spread rates and began to sell just about everything, including commodities. With some degree of normalcy now returning to the markets, we can expect those items that have become ‘oversold’ to begin to bounce back, and after a while the commodities that I referred to in the opening section of this article to outperform everything else.

Please remember that the ‘real rate of interest’ (T-Bills less CPI), remains very negative.  As long as the rate is negative, gold can and will rise (with hiccups in between).

Happy trading!

Peter Degraaf

 

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DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions.

Peter Degraaf is an on-line stock trader with over 50 years of investing experience. He issues a week-end report for his many subscribers. A sample copy of a previous report is available upon request. He can be reached at itiswell@cogeco.net.

At his website www.pdegraaf.com you will find a number of long-term charts that are updated regularly. 47 pages of worthwhile quotes are proving to be a very popular attraction as well. Subscription information is also available at the website.