Inflation, Deflation & Common Sense

By Michael Kilbach

Investment Scoring & Timing Newsletter

November 21, 2008

 

 

We have recently noticed many newsletter writers and commentators who were formerly calling for “Inflation” and are now switching their analysis to the growing popular theory of “Deflation”.  This very well may be ‘The’ great debate of our time. 

 

Why is this significant and how does this effect investors? 

 

Background Information:

 

During periods of inflation the supply of money and credit expand, causing the value of each unit of currency to decrease.  As a result, assets rise in price.  Investors may then wish to protect their wealth by investing in “hard assets” such as silver and gold.

 

During periods of deflation the supply of money and credit contract, causing the value of each unit of currency to become more valuable.  As a result assets drop in price and investors may wish to hold currency in order to buy cheaper assets down the road.

 

At investmentscore.com we are much less concerned about what ‘is’ happening and much more concerned about what is ‘about’ to be happening.  Psychology of investors and analysts as a whole never changes.  Amazingly some analysts will switch a well studied point of view right at the absolute worst time. 

 

 

 

In the above charts notice that November, as highlighted by the green circles, is not a particularly strong time of year for precious metals.  Also notice that the price of silver and gold tends to be higher a few months after November and in some cases significantly higher.  That does not necessarily mean that prices must follow this same pattern this time around but it does increase our confidence that it may happen again.  In other words, we think it may be a much lower risk decision to add to precious metals positions in October and November when the price is dropping rather than in February when the price is blasting higher.

 

The above chart also shows us that it may make sense as to why some analysts are throwing in the towel and changing their predictions just as the market may be bottoming.  Analysts and investors opinions tend to change at the most extreme low point in a given market.  As you can see in the charts above, the price of silver and gold in November typically follow a prolonged period of weak price action.  We are not suggesting that prices have to head higher in the coming months, but we are suggesting that it may be too early to panic and abandon ship.  Perhaps it would make more sense to change ones opinion if prices were falling in December, January, February, and March etc. but not in August, September, October and November.  Based on the above charts we expect the coming winter months will likely be stronger rather than weaker.

 

We cannot say that we have all of the answers.  It may very well be true that we have entered a new period of deflation and an intermediate term trend is deflating asset prices.  However, should this be true, we still believe one heck of a bounce is likely to occur after the devastating crash that recently occurred in all assets and we therefore do not believe that selling out of ones positions in November of 2008 would be a wise decision.  At this time, we believe prices will likely be much higher in the winter of 2009 and we plan to use our custom built timing charts to help us determine when it may make sense to take some of our positions off of the table.  If you wish to learn more about our investment strategy and to sign up for our free newsletter, we encourage you to visit our website at www.investmentscore.com.

 

 

November 21, 2008

 

 

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