Deflation Talk As Contrary Indicator

The National Inflation Association, looking at the recent deflation talk, concludes it's a contrary-opinion signal to buy gold because two previous spates preceded strong rises in the price of the metal.

The largest spike this decade in articles about deflation came in May of 2003. At that time, the Dow Jones was 8,500, the price of gold was $350 per ounce, and the price of oil was $30 per barrel. The Dow Jones went on to rise for four years straight reaching a high in 2007 of 14,198 up 67%. Gold went on to rise for seven years straight reaching a high this year of $1,248 per ounce up 257%. Oil went on to rise for five years straight reaching a high in 2008 of $147 per barrel up 390%.

The second largest spike this decade in articles about deflation came in November of 2008. At that time, the Dow Jones was 8,000, the price of gold was $725 per ounce, and the price of oil was $50 per barrel. Since then, the Dow Jones has risen as high as 11,257 up 41%, gold has risen as high as $1,248 per ounce up 72%, and oil has risen as high as $88 per barrel up 76%.

NIA has come to the conclusion that the mainstream media talking about deflation is the most accurate contrarian indicator out there. The false threat of deflation in 2003 came at the beginning of the biggest rise in asset prices in U.S. history. The false threat of deflation in 2008 came almost exactly when stocks, precious metals, and commodities had reached their bottom. NIA believes that the threat of deflation today could mean that the biggest move to the upside for gold and silver in history is right around the corner.

One possible trigger for serious inflation would be the PRC selling some of its U.S. Treasuries. The most likely buyer would be the Federal Reserve, which would jack up the monetary base and likely lead to a ramp-up of the money supply. It could lead to serious inflation.