Deflation followed by a much bigger inflation is what comes next

Investors are very confused by what they see in global markets. Stock markets are deflating, so are property prices and even commodities. That is what you get in a major sell-off: a sudden deflation of all asset prices.

Gold and silver owners have been annoyed to find that this also applies to them, at least in the short term. The rush is to liquidate assets into cash and that generally means the global reserve currency the US dollar.

Dollar weakness or strength?

This is short sighted if understandable. The US dollar has major structural flaws that have only been exaggerated by three years and $16 trillion of money printing. The perceived strength of the dollar now an illusion with the volume of money so much higher.

It is only the sell-off itself and the automatic flight into cash that results that is boosting the value of the greenback, and for the moment it looks better managed than the euro, another illusion if ever there was one.

Of course, the dollar will probably get stronger before this legacy of hard living catches up with it. But the intractable mess in the eurozone is sure to result in some kind of massive bailout, with the creation of even more money and that will be inflationary down the road.

So in the short term we will have the typical deflationary squeeze of a recession with competition for customers forcing prices lower and the price of commodities falling for a while. The central banks will be only too happy to see investors comfortable with their paper money.

Easy money

But this will prove a fool’s paradise as the inflation from money printing begins to emerge. And doubtless once Europe gets a taste for the easy medicine it will follow down the road blazed by the UK, Japan and the biggest money printers in history in the USA.

How will the dollar fare then? It might be worth more in euros or yen but what about loaves of bread or gallons of petrol? It is in this environment that precious metals will come to be appreciated as a real money that cannot be printed, and as inflation rates rise and rise they will come to be the only money with real value.

This is not a theory but a reading of past history when similar monetary debasements have occurred and the impact on gold and silver has always been the same. Will it be different this time? Buying gold and silver and related assets on price weakness is thus the way forward but you do have to learn to live with their volatility.