Deflation, not inflation, may limit gold’s upwards potential

I’ve been involved in the GOLD markets since 2003 and have heard most of the arguments regarding its performance during the flations.  My personal thought is that GOLD will do better during DEFLATION as the ability of debts to get repayed diminish.  Not to mention that the worlds Central Banks will print money in order to prevent it.  Its almost circular logic. Deflation means inflation in the market sense.

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Gold’s upward potential is limited because of strong demand for the U.S. dollar to repay a burgeoning debt amid deflation, technical analyst Robert Prechter said on Monday.

However, Prechter, known for forecasting the 1987 stock market crash, said that investors should own a small amount of gold, together with U.S. Treasury bills and cash, for safety and wealth preservation.

“I think gold is not going anywhere, not $5,000 an ounce like many people are predicting,” Prechter, chief executive at research company Elliott Wave International, told the Reuters Investment Outlook Summit in New York.

“It seems to me that the most popular opinion out there right now is hyperinflation. I think that we are in an opposite environment — a deflationary environment,” Prechter said.

In May, he said that gold might have already topped at above $1,000 an ounce in March 2008.

Prechter called gold “real money”, and said that differentiates it from other commodities.

“Unfortunately, in this environment, what creditors…and debtors need the most are dollars, so I think the main thing that will return to substantial demand when deflation bites again is the dollar,” he said.

Investors often view gold as insurance against the falling value of their dollar-denominated portfolios. The inverse relationship between gold and the dollar broke down early this year as both assets benefited from a flight to safety.

Asked which investment he thought would be the safest, Prechter said that the U.S. Treasury bills were on top of his list.

“I think gold is a good thing to have. It would be a small amount, you should have some gold. For the most part, you want cash and cash equivalents,” he said.

http://mineweb.com/mineweb/view/mineweb/en/page33?oid=84973&sn=Detail

Last 5 posts by MacroMan

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