It’s been an interesting 6 months. Here's how I saw the economy unfolding in my “Looking Forward” article in December of last year with my present comments in bold:

"Given some possible nasty problems in the first quarter, I think the days of disinflation and actual deflation are numbered. Whether sooner or later, I see growth higher from here after years of stagnation, gaining momentum in the second half of the year, and building momentum from there". 

"It's for this reason that I am predicting a turn in gold, silver, and most commodity prices in 2014".

With that prediction, gold moved from 1180 in late December to near 1400 in mid March. And this at the same time the GDP was falling to minus 2.9%.

"Where gold has been discounting disinflation and possible deflation since October of 2011 and has been falling, I think it will begin to discount 2-4% inflation rates over the next year or two".

Since the 1st of the year inflation rose from .07% toward 2-3% rates, and the PPI rose by as much as 5.5% in the last report.

"Once inflation stops falling, the discounting process of falling commodities will also end. Instead of commodities discounting weakening world demand they will begin discounting strengthening world demand, and higher prices will result".

Here's where my forecast starts faltering. We did move to just under 1400 on gold and 312 on the CRB, but by the first part of April all indices started moving back down.

"The CRB which fell from 370 in 2011 to a recent low of near 270 should bounce back above the 300 level at the minimum and run higher".

It did just that as it ran to 312 in April but then fell back to near 300 again.

"Gold and silver should put in a similar performance. If both GDP and inflation rise or even firm from here, regardless of the headwinds we face, then interest rates and gold should move up together".

Both did rise, then fell back together again with all commodities.

"By the end of the year I expect things to be much different than the first part of the year, with inflation trending higher along with higher long term interest rates as the markets discount 2, 3, and 4% inflation rates and higher world growth rates to come...The year 2014 I believe will mark the beginning of this multi-year reversal in trend. The process of returning to normalization, however, will be slow at best".

"...In light of the possibility of such a scenario, good resource companies that have been crushed and sell today for fire sale prices, may be a good investment for those looking out over the new era we hopefully are about to enter".

I went all in at the first of the year, lightened up considerably as gold faltered, and went all in again at 1240 gold. (See my Market Update at

So where do we go from here?

The world changed dramatically as the first half came to an end. The ECB moved aggressively on the monetary front to fight deflation, which still persists in areas of the Eurozone. And the mid-east is under siege which is changing the balance of power world-wide. We must keep an eye on Iraq, Iran and Syria. Russia is also on the move. All of these events have disturbed the production and distribution of oil and gas and this has led to the prospect of higher inflation rates led by higher energy prices.

Even though most economists have reduced their estimates of growth in both the US and the world at large, it is mostly due to a drop in GDP that has passed. If one bases his forecast on a declining annual growth rate, he will miss the real story. The question is not, "what will the growth rate be, given the weaker than expected first quarter?" The question is, “what will the growth rate be for the next 4-6 quarters?” It's the difference between looking at an economy growing at the most recent GDP figures of minus 2.9%, or the Fed’s expectations of plus 2.2% for calendar year 2014, or looking at the next 4-6 quarters that could be running at 2.5 to 4% rates. The point being, the direction is up.

And the same is true of inflation. If the move is up from here and the worst of the recessionary/deflationary pressures are behind us, then the direction for gold and most commodities is up. The battle between inflation and deflationary forces has been resolved. And so has the forces of recession versus growth. So, let us stipulate…

Resolved: inflation fears have replaced deflation fears.

Resolved: GDP will be lower than anticipated for the year but higher than last year and growing.

We are in the midst of an economic climate change from recessionary/deflationary concerns to a growth/inflationary scenario.

Let me make one important point, I see no major threat of runaway inflation. What we are seeing is the end of deflationary/recessionary pressures and the beginning of inflationary pressures. This reversal is sufficient reason to see gold stop going down and begin going up.

The Fed knows how to fight inflation, (a lot better than they know how to fight deflation) and will not allow inflation to "runaway". That is their mandate, and they've proved they can contain inflationary pressures over the last 35 years. There is no reason to believe that this Fed although more dovish will not execute their mandate of price stability if and when inflation begins to alarm markets. However, I believe they will not fight inflation at first – they will only fight it at last.

However, keep in mind that at any time deflation and recessionary fears can return to the market. A major spike in oil prices, unforeseen geo-political events, or negative financial surprises around the world could change the economic trajectory suddenly and substantially. And let's not forget the election in November which can change the political as well as the economic climate as sentiment and expectations change – and that is in either direction. Politics is still a potent economic factor.

The CRB remains stubbornly under its old high of 312. I always look at how things can go against me, and a double top in the CRB is one possible scenario that is troubling me. What if we are peaking in our inflationary expectations? What if this is a one-time snap back effect from an abnormal 3% plunge in the GDP? Durable goods came in lower than expected, down 1% in May, and this during the supposed 2nd quarter “snap back”. I would like to see the CRB move higher from here to more normal levels.

Perhaps the most worrisome piece of data is the still falling interest rates which persistently fall as if we're heading for recession, totally ignoring the higher inflation rates and the snap back of GDP. It could be the combination of the recent geo-political events and the deflationary/recessionary bias in much of the rest of the world. It could be a continued run to safety world-wide. But interest rates should not be falling as inflation fears and growth projections rise. I will be watching this very carefully.

Growth slowed markedly in the Eurozone in the latest figures released. France depressed those figures as it sunk further into the abyss with a sharp decline in their own GDP to zero in the first quarter.  This is what you get when you target the rich with wealth taxes -- you hit the little guy instead. Germany also declined unexpectedly, and deflationary fears still persist throughout the region.

Yet the preponderance of evidence is with the growth/inflation scenario. I will conclude by repeating what I said before: by the end of the year I expect things to be much different than the first part of the year. And I expect gold to respond accordingly. The trend is up.

Paul Nathan