Excerpted from the October 11th edition of Notes From the Rabbit Hole (NFTRH54)

In late 2008 and early 2009, there were very strong arguments being made by the 'deflationists' that, if taken seriously would have sent anyone thinking about a bullish stance on gold, silver and commodities to a therapist to have his or her head examined.

I know this, because on several occasions I was the recipient of scary deflationist input as I maintained a stance that called for a rebound in the inflation trade, extending to the broad global markets. Constantly watching the money supply aggregates and TED/LIBOR economist geek stuff helped, but sentiment was my main bullish driver.

Yet there was a degree of difficulty then in being contrary the popular mindset. There always is. The deflationist Yin after all, had current events on its side, along with the major media in full deflationary Armageddon mode.

Today, being a disciplined buyer of bottoms and seller of tops, I endure the Yang, the inflationists, and their reloaded convictions about the coming hyperinflationary Armageddon. Since it is with the inflationists that my ultimate big picture views lay, I am naturally more susceptible to their siren call for the end of the US dollar, gold 'to da moon' and oil to whatever target Goldman decides to come out with this time. This is the reason I hold certain gold stock 'investment' positions despite the increasingly shrill tone of NFTRH's recent risk analysis. I know that with quality gold assets, it is only a matter of time before any 'bag held' positions are bailed out by the value contained therein. But the general theme now, in what I'll call Full Tout '09 is that of a trader.

I agree with the inflationists that eventually, commodities, the very resources of modern life, are going to get out of the barn and go higher, as will the emerging markets that produce them. That is because these resources are after all, priced in valueless paper that is being - I can't say debased because how do you debase something that is devoid of real value? - created at will in support of the prolongation of something unsustainable; namely the modern financial system that is based on issuing credit backed by nothing and throwing it at favored (and powerful) recipients, like the big financial institutions and the big unions, as is currently the case.

This segment of the report is being written during market hours on Friday. I see the dance playing out this morning as gold, silver, precious metals stocks and the broad market open down. Is this it for the inflation traders? Probably not. Speculation will end when it ends, and many gold stock charts do not yet look fully expressed to the upside. But we are close. HUI targets 470 (currently at 446) with perhaps an overshoot, before all is said and done. Gold now looks to the 1,100 area.

This is where I usually mention risk vs. reward, and it stinks. Not in owning the value anchor that is gold, but in commodities and stock markets especially, and also for precious metals stocks in the near term. But again, there are certain gold stocks I do not mind 'holding the bag' (as an investor) with, and would indeed look to add to the bag's contents with any coming buying opportunities.

The general risk to reward ratio is unpalatable. But NFTRH has been saying that for months now and I am learning, while completing my first year as a newsletter writer, that these extended periods of... we'll call it slush, come with the territory. If the writer wishes to maintain integrity, that is. That is my wish, so I will continue not telling you what you want to hear, not jumping on the Pumpsville Express, and instead continue to try to provide perspective amid the noise.

The Yin told me I was dreaming in February/March when upon a higher low and a break of the downtrend in oil, targets of the mid-60's and possibly 78 were established. Despite the inflation hysteria, oil has not yet hit the higher of these targets. Maybe we can add this divergence, and that of the still unbroken $USB long bond to the story the Yangs would have us believe during the festivities of Full Tout '09.

Or, maybe oil will make a final surge to and/or through our target. The main point however, is that this was all in the cards. Yang may be right this time, but until the sentiment and technical analysis argues differently, it is wise to remain on alert for a top in the entire post-crash construct. Gold excepted of course, since its status as a historic anchor to real monetary value will come into play in any environment and at whatever nominal price.

Meanwhile, sentiment has been flipped on its head. Do you remember how long and agonizing the bottoming process was in most markets? Yang believes that this is more than a reaction to Yin's initial thrust downward. If Yang is not able to break the symbiotic relationship, Yin is going to hold sway again before too long, and sane navigators of the process are going to do the best we can to survive and thrive during the swings.

Yin and Yang need each other in a bizarre and symmetrical way (remember deflation as the 'lever' to future inflation policy?). One begets the other. Until that cycle is broken, I plan to continue to play the swings between them. One day we will know if this has been the final dance between the two on the way to an inflationary future. The ball is fittingly, in the US dollar's court now.

Here is a video clip of three gentlemen who appear to have received some pressure to start defending the US debt note. http://tinyurl.com/nftrh54. As you know, talking head #2 has been one of my favorite indicators on US treasury bonds (do the opposite of what he says and you're fine, for the interim swings at least). All three of these gentlemen sound like they are reading from a script. Is this a contrary indicator that portends imminent and further downside in the USD? The tone, especially that of Mr. Geithner and Mr. Summers, sounds like one of submission. As if the boys have been directed to play nice with the currency.