Strong Gold, Weak Stocks

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". . .the sum total situation will be deflation as defined by: Deflation = Reduced Supply of Money AND Credit."

I've harped endlessly on the point that stagnant-to-falling incomes, soaring joblessness, imploding credit and collapsing asset values make inflation nearly impossible at this time. Here's our friend Senor Cuidado once again, explaining this more lucidly than I have.

"It's all going to be extremely chaotic. . .and deflationary. I will stick with a prediction of a strong gold price in the neighborhood of Sinclair's target in response to the credit collapse, plus an equity market collapse as a response to the credit collapse, plus a substantially weaker dollar (as foreign investors respond to our credit collapse). That will be the new status quo. And, yes, the sum total situation will be deflation as defined by: Deflation = Reduced Supply of Money AND Credit.

"At some point the oil price might reach, say, $5, but it can't stay that high for long. And the dollar can briefly rally again in the panic…but it's going to take the big haircut and then stabilize at a lower "new normal." It's not the 1970's all over again, but it's not the 1930's exactly either. The dollar would have gone to the moon if this was the 1930's and we were a manufacturing/producer/creditor nation. And, paradoxically, glossing over the differences between today and the 1970s is also a big mistake. Mish's deflationary real estate maxim is in play for the foreseeable future, and that card was not on the table during the 1970's, and neither was our current insane level of debt and dependence on foreign creditors.

"Also, some will argue that future high interest rates will boost the dollar back up to the levels of the past decade -- but remember that the dollar never returned to its pre-1970s level. Even after the Volcker era the dollar was dropped to a much lower 'new normal' and stayed there for about three decades as measured in gold. Sinclair is smart to predict the higher 'new normal' for gold."

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