Gold Price: Deflation Ends And Inflation Begins

The world is undergoing a major economic transition from deflation to inflation.  Sadly, very few retail investors are correctly positioned to benefit from this exciting change.

In the big picture, the transition means that gold stocks will outperform gold bullion, and bonds will stagnate.

Chinese and Indian stock markets could boom.  Western stock markets could also get dragged higher, but investors there have a lot more risk than Chindia investors.

I predicted that Janet Yellen’s first actions as Fed chair would be to begin to transition a deflationary world to an inflationary one. 

I said she would do that, ironically, by tapering QE to zero and raising interest rates, and that’s exactly what she is doing.  Now, the world’s top institutional economists are beginning to adopt the same view that I had years ago, which is that QE is inflationary for Wall Street, and deflationary for Main Street.

Rising oil prices are already putting pressure on the yield curve and the ten-year bond.  That’s likely to accelerate in 2017.

Top economists at JP Morgan, Merrill Lynch, and other major financial institutions are all turning negative on bonds, and becoming very positive about commodities.

These institutional money managers move truly gargantuan amounts of liquidity, and the early 2016 rally in gold stocks was the canary that sang loudly in the “inflation is coming” coal mine.

This transition is not going to benefit day traders.  It’s going to benefit Western gold community investors with a long term horizon, and make them richer than they can possibly imagine. 

It’s multi-year process, not an overnight event.

Western real estate can initially continue to do well as rates rise.

That’s mainly because Chinese markets are opening up wider, and citizens there are maniacal savers, sitting on about $25 trillion (USD) in savings.  That money will continue to pour into Western real estate even as rates rise, because inflation will rise faster.

Top analysts at Barron’s believe peak liquidity and peak bond prices are here. 

The bottom line is that with the exception of China, governments around the world have done nothing for Main Street while central banks have provided gargantuan stimulus to financial assets.  That’s about to change, and the change is incredibly inflationary.

That’s take a look at the Indian small caps market, which is up about 65% from the 2016 lows, and poised to blast out of a massive inverse head and shoulders bottom pattern.  When inflation appears, small caps tend to outperform large caps in a major way.

India could potentially achieve 10% GDP growth very soon, and 8% seems like a “walk in the park”.  As that growth continues relentlessly, commodities like oil (and especially uranium) are poised to benefit.

That’s the daily gold chart.  I’ve outlined a bit of a grind for gold in the next few weeks.

From a fundamental perspective, gold needs another rate hike from Janet to move higher.  In late 1979, rate hikes were negative for gold, but for most of the 1970s, gold went higher alongside rates, because inflation grew faster than interest rates.

In the current situation, interest rate hikes are incredibly positive for gold, because of the existence of the huge QE “money ball” that sits at the Fed and other central banks.  Rate hikes incentivize banks to move that money out of the Fed and into the fractional reserve banking system.

Janet is unlikely to hike again until December, so gold is likely to grind sideways until then.  If gold investors look closely at that gold chart, it’s clear that gold really has made little upside progress since it became clear in mid-February that Janet was going to delay further rate hikes.

This is the monthly bars gold chart.  Gold must grind sideways now, to form the right shoulders of a huge inverse head and shoulders bottom pattern.

I don’t expect the grind on the right shouldering process to take anywhere near as long to form as the left side did, which is good news for all gold price enthusiasts! 

This is the daily bars GDX chart.  Gold stocks are also likely to grind sideways for now, and then begin an enormous rally in 2017.  Gold stock investors should focus on the $22 and $18 price zones for fresh buying.  What’s coming in 2017 is not a “bull market”.   It’s the start of a wondrous bull era!

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