Inflation, Deflation, or Hyperinflation?

In the following post, I’m just going to make a couple of points concerning the inflation vs deflation vs hyperinflation debate. I’ll try to write something more thorough in the future.

Americans often throw around arguments along the lines of “real estate is down, but commodities are up, so we have biflation.” Ok let me get this out of the way first:  U.S. real estate is a domestic market; commodities and gold are global markets. So when people talk about the the collapse in real estate reflecting a deflationary trend that will eventually hit gold, their thinking is flawed. Gold can rise substantially independent of conditions in the United States. Now it just so happens that the U.S. dollar is a critical market in this juncture in time because we are in a global debt crisis. Foreigners are accustomed to running to the safety of the dollar and gold in times of economic panic. If people were to lose faith in the dollar, they would be flocking to gold in a big way. A sell-off in the dollar will be inflationary, but this does not mean domestic real estate will suddenly rise in tandem with gold. This is just nonsense.

 One must look at various asset classes independently and try to figure out what the respective price drivers are. Copper has nearly tripled since 2009. I view commodities as supply/demand and dollar plays. Gold is sitting at $1315, which reflects waning global confidence. The U.S. real estate market is in shambles because of the loss of leverage. People can say we are in a time of deflation, but they are just cherry-picking asset classes to look at. As a whole, an inflationary trend appears to be upon us.

At the opposite end of the spectrum of deflationists are hyperinflationists. While I sympathize with them, a hyperinflationary event is very hard to forecast. At what price level would gold have to go to for people to declare hyperinflation is upon us? In the gold bull market of the 1970′s, gold went from $35 to $850. A similar move today from the lows  in gold would have gold trading at $6000. So gold can theoretically quadruple from current prices and you could see no hyperinflation. At $10,000 or $20,000 gold we can start talking about a hyperinflationary event- but until then, what we are seeing can just be regarded as good old inflation.

No matter what the chances are of hyperinflation, I regard not buying gold as insurance as folly. Even if there were only a 5% chance of a hyperinflationary event, you would be wise to buy insurance in the form of gold since a hyperinflationary event has an asymmetric impact on your life. People tend to think only in probabilities when they should account for magnitude as well. This is the kind of thinking you must bring to the market.

Let me give you an example of this thought process as it pertains to gold. Say there is a 25% chance that gold will continue to rise here without correcting. If you think corrections will be shallow (say to $1250) but upside moves will be explosive (say to $1600), you should not be selling even though the odds favor a correction. Three out of four times you will make $50. But the one out of four times you are wrong, you will lose out on a potential $300 move. Even if I thought there was a 99% chance gold would correct, I would need to account for the magnitude of potential moves before making a trading decision.

Gold has proven throughout history that it rises in times of deflation, inflation, and hyperinflation.I know it appears like I’m saying gold is a “cant-lose” trade, but I’m not.  It is just that factors are starting to line up that are very bullish for gold. If you take a look at the current gold price action, it is pretty bullish. We may very well see another record high weekly close. I will not be  chasing here, but I also wouldn’t be surprised if there were no meaningful pullbacks. You must have been positioned for this ride or else you are surely panicking rigth now. This is ultimately a bull market for the ages, and I am not going to get cute trading it. I will just buy the dips and let the market take care of the rest.

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  • gerimegaly

    Hey Moses, great insights & love your posts!
    Btw, Soros says that Gold is the “Ulitmate Bubble”, and yet, his fund holds so much of it –

    • Moses


      Haha, Soros is indeed behaving like a true speculator. When he made that statement, I remember saying that I wouldn’t be surprised if he was actually adding to his gold positions. His approach to the markets is a little different than most, so people shouldn’t analyze his statements literally.

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