In price inflation, the wealth redistribution is obscured more than in a price deflation. In a price inflation, creditors lose slowly as the money they receive on their loans loses purchasing power.
Opposition to falling prices can arise from debtors because their debt burden increases. The consequences of deflation are more concentrated than are the more diffuse effect of inflation. The debtors tend to be well organized. Today, governments are the largest debtor class. They are using their power to keep rates low and liquidity high. Few people realize that Obama has run up more debt than all US presidents in history combined. High rates and deflation would be very difficult for all governments, so they exercise their power to keep rates low through central banks. I see no change in this trend.
The gold and the stock markets have different drivers. The stock market tends to rise year after year due to population growth, technological developments, and currency inflation. The commodity markets do not benefit from all three. Thus, the stock market tends to rally and then retrace part of its prior advance such as 38% or 50% of the previous bull market. Due to the lack of support from the same drivers, commodity markets can retrace 100% of their prior advance.
My experience since the mid 1969s is that a commodity bull market is seldom followed by a new bull market. Many years must pass before the basis for the next bull can be established. The commodity bear that began in 1980 lasted 19 years.
Gold already disappointed by closing the typically-strong August on the downside. September has been the strongest month in September, rising by only $6. When the seasonal strength is overridden by a stronger cycle as we see in these 2 cases, it can only be considered bearish. Looking at the next month, the dynamic cycle points down. The seasonal cycle peaks on the 10th. The second half of October has usually been corrective for gold. The 1250 area is the downside target.
The GLD/UGL relative price graph below shows a low reading. This tells us that traders are buying the more aggressive UGL double ETF over the GLD single ETF. I regard this as a sign of bullishness. Despite the lack of a September rally, traders remain very optimistic and aggressive. This typically leads to lower prices.
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