Deflation Should Follow Gold's Expected Peak

Bud:

My name is Bud Fox. I own a website called www.GreedandMoney.com. It's a technical analysis website, analyzing US equity markets. I provide an intraday update, as well as daily updates. I also post my personal trades as well.

It's kind of confusing, not only to traders but to the general public as well, that we seem to have two camps of people. One group thinks we're in an inflation scenario due to the Federal Reserve monetary and fiscal easing. The other camp - including some Elliott Wave followers - thinks we're in a deflation period. The inflation camp points to commodity prices, agriculture, metal, energy and the equity markets that have rallied pretty strongly since March 2009, while the deflation camp points to housing prices, which have been depressed for a couple of years now. People's wages have not gone up either.

What camp are you in? Do you think we're in a deflation period? Can you explain why something like gold has gone up so much and doesn't seem to be able to stop?

Glenn:

In my opinion, until gold starts cutting lower, the real deflation is probably not going to be in effect. You can always have markets that lead a trend and markets that come after or follow the trend.

In this particular case, it's possible that the housing market is leading the way before the the rest of the economy -- commodities, stocks and so forth -- are.

The probabilities are that we won't get any serious deflation until the gold market peaks and starts to decline. Based on long-term wave patterns going back 100 years, it does appear that we're at the tail end of a very large uptrend.

That doesn't mean gold can't go another $100, $200 or even $300 higher in a relatively short period of time, just like it did in the late-1979 to early-1980 period, where if I remember correctly, it went up $300 or $400 just in the last few months. We know how that situation ended.

It's not an issue of how high it's going to go. Once it's finished, then I think we're finally going to see a pretty dramatic deflationary period get under way. Long-term gold charts indicate gold could drop more than 50% after it peaks within just a few years. That would be quite a dramatic change.

Any time a market is heavily followed by the public and a main topic of discussion and concern, usually it indicates that trend is coming to an end. The fact that gold is being heavily advertised on TV, a lot of people are worried about inflation, what the Fed is doing and all of these different concerns, these are all evidence of this.

It all points to the fact that we're approaching the end of this trend, which in this case is the inflationary trend. If things were that bad or were going to get really bad, the public wouldn't be so worried about inflation way before there's really any serious inflation.

According to government statistics, the inflation rates just recently got up to 3%. Before that, it was 1% or 2%. I think at one point it was even negative. That's not really what you would call inflation.

I lived in the '70s and if I remember correctly, the interest rates were close to 20%. I can't remember what the inflation rate was, but it was significantly higher than what we're experiencing right now.

There's too much anticipation of things getting bad, which means it probably has already gotten bad and this is probably as bad as it's going to get.

Once the trend really changes, people are still going to be taking actions as if the inflation part is going to happen, but the worst has probably already taken place. I think we're extremely close to the end of that uptrend. Once gold starts down dramatically, I think everything else will follow.

You have this other large trend, which has to do with the credit bubble that obviously burst in 2008. That has really long-term implications for the economy, banking system and general public. They go through periods of credit expansion and contraction.

We went through a period of expansion of at least 20, if not 30, years. You could even say it has been going on for almost 100 years. That expansionary period is not going to end after a year or two. It's going to be a really long, drawn-out process.

Usually, no matter what the size of the move up, the correction will happen at least 25% of the time. Generally, it will be 100% of the time or more. There's a very good chance that the credit contraction will take many years, if not a few decades.

When a credit contraction is occurring, by definition you're having less and less money in the system. People are paying off debts and not able to borrow money as before.

The amount of money in circulation keeps decreasing over time, and that means that the money that is left is worth more and more. By definition, that means deflation because deflation is a period where the value of the dollar is increasing in relation to everything else.

I think we're very close to that point. I think that's one reason why the Fed was able to do what it did in 2008-09 and spend so much money so easily. They know that, despite all of the money they've spent, it's not going to be enough to counteract the massive credit contraction that we're going to be going through for the next 10 to 20 years.

It's a little bit they could do, but it's the most they could do and get the public to allow them to do it. From this point forward, I doubt we're going to allow that to happen. It's going to be nothing but the deflationary and credit contraction forces that will be in effect for many years.