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The Gold Man: Inflation/Deflation

November 12, 2008 – Comments (5) | RELATED TICKERS: AEM , GTU , KGC

http://theinvestortimes.blogspot.com/2008/11/gold-man-inflationdeflation.html

First, during my weekly conversation with our resident gold bug I heard a few of his thoughts:
"I'm starting to think that this could be a serious deflationary depression [like the '30's]... If that happens gold will obviously depreciate in value..."
The first thought that came to me was: if our gold bug is thinking sell when his portfolio just lost 30% either
A) something is really wrong
or
B) something is really wrong with valuations and now is a good time to pick up some of the shiny stuff.

So, to figure out which one it is lets do what any rational person would do, look at some facts:

The g0vernment is creating money like its going out of style (and if they keep this up it soon will)The banks are de-leveraging from the disgusting multiples that accumulated in the real estate boomWhen loans are foreclosed on M3 (our most comprehensive measure of inflation) drops. We are seeing a ton of foreclosures and that isn't likely to end soon (for more click here)All the billions that are going into fixing this (the big $700 + many smaller, less publicized packages and private investment in the form of loans) is bound to create more money. Now a reasonable person would say, look at the numbers and use that to figure out what is going to happen. Well that's great but we can't because we don't know what is in level 3 (an asset category for banks) and one couldn't possibly find all of the loans that are going around to plug this thing up, so what we are doing instead is looking at the past to determine the future. Some would claim this is foolhardy and liken it to the old quote: "its much better to see where you've been than where you're going" but in reality it works just fine because all of the aforementioned things are happening now at a rate similar to what we can expect in the future. So lets take a look at M3
from: http://www.nowandfutures.com/images/m3b.png




















So what this shows us is that even without the circulation of a large part of the money the government is threatening to create M3 is going up at an alarming rate. With this dough it could really head for the sky. If we are experiencing rabid inflation with no end in sight why isn't gold going up? Because:
1) banks are selling what they can to de-leverage and plug holes
2) because of 1 the price started to drop, it became a positive feedback loop and people like our gold-man are running scared instead of running smart

So with all this said it looks like a good time to pick some up. Not the raw stuff unless your a real doomsdayist but rather some shares of good gold makers, heres a few The Investor Times likes:

Agnico-Eagle Mines (AEM)
Great Basin Gold (GBN)
Kinross Gold (KGC)
Central Gold Trust (GTU)