This letter was written to Lee in January 2015 from a subscriber of Independent Living.
Don S. writes: I am confused. On one hand I am guaranteed hyperinflation; on the other hand I am told deflation is just around the corner. Some time ago I converted a sizable portion of assets into silver and gold coins. In either case, inflation or deflation, what are the upsides or downsides of this type of investment?
Lee responds: I certainly empathize with your confusion, Don. After the Federal Reserve announced “QE3” in September of 2012, it seemed likely that consumer price inflation would accelerate and lift precious metals. Instead, inflation as officially measured, has languished around 1% and the metals markets have been relentlessly hammered down.
As Seth Van Brocklin discussed in last month’s issue, the recent crash in crude oil prices has emboldened deflation forecasters. My take is that the oil market is flashing a warning for the economy and stock market. Recall that oil prices started tanking in mid 2008, ahead of the financial crisis and stock market crash later that year. Yes, there are different dynamics in play this time around – huge supply influx from shale, sanctions on Russia, oil prices not reaching the high mark seen in 2008. But the relief Americans are enjoying at the gas pump may in part be a symptom of weakening economic demand.
If the economy turns down this year and heads toward recession, I would expect precious metals to hold up better than stocks. Gold and silver have already taken their hit, while stocks haven’t.
Gold and silver have been beaten down for basically three years straight. In the case of silver, it’s been one of the most severe pullbacks on record – driving prices below all-in mining costs.
The best environment for precious metals is stagflation – a stagnating economy coupled with rising inflation. That could come about when the Fed acts to try to prevent a recession or bring the economy out of one using the only real tool at its disposal, which is currency creation.