Deflation poses a serious threat to the world economy.

As investors we have lived through periods of inflation which we have come to view with trepidation but we have never experienced deflation although the consequences of deflation can be much more severe.

During a deflationary period the prices of goods and services fall and the consumers and business expect prices to continue to fall. As a consequence purchases are delayed with the expectation that goods can be bought in the future at a lower price. The result is that demand for goods and services falls and prices continue to fall, so businesses see their sales decline and are forced to reduce staff. The economy falters with rising unemployment because demand for labour is less and less. Consumers spend as little as possible leading to a deflationary spiral as happened in the Great Depression.

We are now seeing the likelihood of deflation in the European Union despite actions by the… Continue reading

The bear market in gold is not finished!

Over the past few weeks there has been significant interest in gold stocks.  I do not see this as a resurgence for gold but simply a short term bear rally before an eventual fall to around $950.

The following daily chart of Kingsgate Consolidated is an example of the apparent resurgence that is evident in many gold stocks.  This chart is similar to those of many gold stocks and shows the formation of a base and a potential breakout with opportunities for the trader. Kingsgate

Consider the weekly chart of gold below which shows an RSI divergence, suggesting a recovery.  On the monthly chart of gold which is not shown, the RSI divergence is much stronger, supporting the contention of a recovery.  From these data it looks like gold could have at least a short term resurgence. Gold 1

On the final monthly chart of gold below… Continue reading

It really is different this time!

This time it really is different.  We now have historically low interest rates and central banks are printing money at unprecedented rates.  It was assumed when central banks adopted quantitative easing that very high inflation would be inevitable.  But while equity markets have certainly climbed to the point of a bubble, consumer prices have not followed and there is now some trepidation that the developed economies are now entering a period of very low inflation with even the threat of deflation.

The trend is particularly noticeable in the European Union where where annual inflation dropped from a low of 1.1% in September to 0.7% in October.  This compares to a year ago when the inflation rate was 2.5%.  Last week the ECB halved its interest rate to 0.25%.   In the United States inflation is well below the Federal Reserve’s 2% target. Taking a… Continue reading

Deflation and the secular bear market.

We are now in a secular bear market which started in 2000 in the US but here in Australia it started in 2007. We are apparently entering a deflationary phase driven mainly by sovereign and corporate debt, the consequences of which are likely to be higher unemployment, low interest rates, low growth and low commodity prices.  These are all ingredients for a world recession.

A secular bear market will be protracted by the effects of deflation and low economic growth.    Markets will be driven lower by falling corporate profits. Returns from equities for perhaps the next decade are likely to be very poor.

Australian investors are much better off than their American counterparts.  The US investor is faced with zero bank interest rates and Treasury bond rates that are less than the rate of inflation has no alternative but to invest in equities.  … Continue reading

Inflation or deflation?

With uncertainties prevailing in world markets there seems to be ongoing confusion about the potential for inflation.

Although there is a need to stimulate growth with lower interest rates, understandably those few central banks that still have the option of lowering interest rates are very cautious about doing so because of the potential for increasing inflation.  But what are the realities of inflation?  With severe economic problems in Europe and significant problems in the US economy it is very likely that we will see deflation and not inflation in the foreseeable future.

The reasons for this are that the developed world is now in a stage of low growth and falling commodity prices due to falling demand for commodities.  This deflationary phase is now being  driven by high unemployment, high debt, and increasingly limited access to bank credit.  In this low growth environment we… Continue reading

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