In my year-end article "Looking Forward: A Year Of Resolution" I conclude with the following:

 

Bottom line: the future course of the economy and inflation is still unresolved. The falling gold price that began in 2011 has predicted and led the commodity sector, the economic growth rate, and the inflation rate down. Gold is an excellent leading indicator of economic and monetary conditions in the future. As we close the year gold is marginally lower but stable, interest rates on the long end are basically unchanged, stock prices are flat for the year, and most economic and monetary indicators mirror the beginning of the year. We are today where we began. 

As an investor and trader of gold and silver stocks, I sold out most of my gold position in both physical gold and gold and silver stocks and went to 100% cash in 2011. I have only a small position in precious metal stocks today. I stopped trading gold and silver stocks entirely in April of this year and have only recently begun to build a new position. I think we are at the beginning of a new bull market in gold. 

If we see another leg down, chances are it is telling us we will see deflation and recession world-wide. And if the reverse occurs we are likely headed for higher world growth and inflation rates. Either way, 2016 should be a year of resolution.

 

I further said in my Market Update offered on my site Paulnathan.biz, that the resolution would most likely come in the first quarter. Well, the Fed revised its interest rate estimate from four increases this year to two. They also indicated that inflation can overshoot their target for a while before taking action on it. I agree. We need at least three months of increasing inflation before raising interest rates. I assume June and/or December will be the most probable months to raise if things go the way the Fed believes.

 

Inflation is showing its first signs of rising. This is confirmed by the long end of the interest rate curve rising. The ten year bond has moved back towards par at 2%. This reinforces the possible reversal of the recessionary deflationary bias we've been experiencing. The stock market rise in the last few weeks also suggests the same scenario. The CRB has rallied up through its 50 day moving average last week, and oil hit 40 dollars a barrel; the dollar fell through 95 from its recent high of 100; and gold has been rising for months.

This all suggests the onset of reflation. The resolution I've been waiting for appears to be at hand. All of this is beginning to point to higher growth and higher inflation in the future. The odds of a recession which were as high as 50/50 a month ago are closer to 20% today and falling fast. And with commodities rising, inflation is becoming much more possible than deflation in the future.

This is a welcomed change. We're not quite out of the woods yet, but we're walking in that direction. My preferred scenario is to see gold prices rising not due to fear, deflation, bankruptcies and recession but rising due to growth, inflation and increasing real demand. In retrospect we may find six months from now that gold was telegraphing an improving economy and a rising inflation rate in 2016.

 

The reason that I raised my investment portfolio from 4% last year to 75% of net worth recently was in anticipation of either a run to gold due to safety concerns or a run to gold due to higher inflation and the defeat of deflation. The odds that either of those scenarios would occur were together much higher than any other scenario. That bet has paid off handsomely and I have taken profits and returned my portfolio size to much more reasonable levels.

However there is one scenario developing that could push gold down substantially:  the growing possibility of a trade war. During the last trade war, world trade contracted 30% in a matter of months. As less money, which was gold at the time, was needed to finance trade, gold demand fell and contributed to the deflationary depression of that decade. This would most likely happen again, at least initially.

A contraction of trade can occur due to the imposition of tariffs and quotas, and it can also occur if the euro zone breaks apart, which due to the immigrant crisis, terrorism, and Britain's possible exit from that treaty is looking more possible.

The difference however between the days of the Great Depression and today's world is the amount of debt that has been created. Potential defaults by governments could re-ignite a run to gold after a dramatic fall as individuals, corporations, and governments hoard dollars then eventually turn to gold for fear of a total international monetary collapse.

 

Kitco News has reported that,"Twenty of the world’s wealthiest countries are facing a $78 trillion pension loss, Citi said in a report on Wednesday. The bank found that for 20 countries belonging to the Organization for Economic Co-operation and Development (OECD), the total value of unfunded government pension liabilities, money owed to public sector workers, is $78 trillion".

 

If trade contracted and defaults began, it could easily lead to a world-wide recession and deflation. Gold would fall hard initially. This is just one of the things out there that can go wrong -- to put it gently. But we're getting way ahead of ourselves.

 

There are also a couple of new positive factors that have entered the picture that could conceivably propel gold substantially higher in the future. Have you heard about BitGold? Not BitCoin, but BitGold.

 

Click here: Buy Gold Online | BitGold

 

This is a new company that is trying to make gold a currency again. In my book "The New Gold Standard" I spent a lot of time talking about the fact that gold is not a currency, and to create a "new gold standard" it would need to be reinstated as a currency. I further pointed out that a new gold standard would likely be substantially different than the old one due to technology.

 

BitGold is a foot in the door that provides a legitimate shot at doing just that. It's a way of remonetizing gold and being able to use it as a currency. If people turn away from fiat currencies run by governments and central banks, to a people's currency in the form of a debit card, it would be a game changer of historic proportions. That could push gold to heights undreamed of. BitGold commercials are running on CNBC sometimes three or four times an hour.

 

Another positive, take a look at the M2 non-seasonally adjusted money supply. It jumped a hundred billion dollars in the first week of March -- the largest I've seen in a very long time. This is actually a good sign and reason to believe that inflation will continue to increase in the near future.

 

I'm not saying that I advocate inflating, but just the idea that a central bank can cause inflation - which Japan has not been able to do, and Europe has been failing to do - shows that deflation is not inevitable. Reducing the inflation rate is easy and we've done it many times. But fighting deflation is a far more difficult task, and a rising inflation rate is evidence that the battle against deflation can be won.

So, there are objective reasons why we can begin to expect growth and inflation rates to rise from here, and I think that is what gold has been telling us with this 200 dollar run. Almost every commodity began following gold's lead in February, led by oil. Interest rates too, turned up from a low of 1.6% on the ten-year to near 2%.

I expect a correction in here somewhere and a consolidation, but the trend has turned.

Resolved: the trend of growth and inflation is up.

 

Paul Nathan

Paulnathan.biz