Tonight I received the following email:

I really enjoyed reading your article: Deflation is in the Cards. I have one question: Based on a recent article by Steve Moyer , he argued that in an event of deflation, the precious metals will also take a hit just like all other asset classes. I also understand you have a quite opposite view in regards to the fall of PM’s in a deflationary environment.

Could you please clarify on how gold, and silver fare during deflationary periods?
Thank you.
Best Regards,

Thanks Ed, I am glad someone enjoys my articles.
(keep those questions and comments coming even if I can not answer them all)
I try and avoid criticizing OBIs (Other Blogger Ideas) but sometimes it is necessary to have a decent discussion. Let me say this: Having read his post there certainly is merit in the idea that XAU and or HUI could crash, especially short term. As for physical gold and silver, or longer time frames I doubt it but am willing to admit that it is possible. Thus I am a gold bug nut not tied 100% lock stock and barrel to the idea.

Take a look around you right now. Certainly the HUI has been totally hammered and gold and is near all time highs. What gives? Let’s take a look at some charts. As always click on any chart for a better view:

Here is the $HUI daily chart

Would you buy that chart?
I wouldn’t. It looks like there is a clear downtrend with another leg to come. But let’s take a step back and look again.

Here is the $HUI monthly chart

Do you see anything wrong there? If so what? I don’t.

Here is the monthly gold chart

There is obviously nothing wrong there.

OK Mish what gives?
This is a theory, no more no less and perhaps Pretcher gets the last laugh with gold collapsing but I do not think so. Clearly (to me anyway) gold and the $HUI are out of sync. I am not the first to notice this of course but rather than blindly say that the $HUI will blast off I am inclined to think that gold is about to put in a 4 and drop while the $HUI continues putting in the “C” dropping less fast.

There are fundamental reasons for this viewpoint as well. Miners have been selling off with general equities much of this year while gold physical has been steady. Perhaps this is due to a liquidity crisis of sorts affecting miners (equities) more so than gold. Cash is being raised and equities are being sold across the board. Also note that trend line breaks typically occur in wave 4 so perhaps we are about to see one on the physical gold monthly chart right now. In this scenario, $HUI falling to 150 or even 140 is certainly not out of the question. If it happens in conjunction with what seems to be a wave 4 in gold, I am backing up the truck in miners.

There are lots of problems with this scenario. Perhaps gold and miner take off right now or perhaps they both crash. Given seasonality factors as well as liquidity factors I am willing to risk miners taking off right now. I am flat and have been so for a long long time.

As long as the FED is perceived to be fighting inflation with rate hikes, and as long as the yield curve is flat to down, miners will likely fail to get traction. Sentiment is overwhelmingly against the US$ now but take a look at the UK. It is a disaster happening NOW while the US is a disaster IN WAITING. That is lending support to the US$. Banking problems in China are lending support to the US$ as are other things. No doubt there are a zillion problems with the US$ but other countries have SERIOUS problems that dollar bears have not factored in.

I think the next leg up in gold starts when the FED pauses. I think gold blasts up when the FED cuts rates to fight the upcoming DEFLATION. In the meantime, as long as the FED is fighting inflation and not deflation, Pretcherites are likely to be more right than wrong. If and when the FED changes tactics, gold bears better change their tune.

This is the key idea: Gold and likely miners will do well when the FED pours on the liquidity spigot to fight the upcoming deflationary credit crunch. My view is that they will NOT be successful any more than Japan was, but the fighting will be beneficial to gold. IF the FED does not choose to fight (unlikely) then Pretcher will likely be correct.

FWIW That is my take.

Mike Shedlock / Mish/