The markets are torn between polar opposite schools of thought. There are those who believe we are in a period of intense deflation, which will continue for some time, and there are those who believe that inflation is inevitable and, in fact, is already with us as consumers can attest.
The Fed must be in the deflation camp. Why else would they continue to create $85 billion/month of new and unneeded bank reserves? Several recent academic papers have indicated that the major industrial economies of the world are so indebted that the world has entered into a period of debt disequilibrium and deleveraging. The annals of history indicate that such periods take an average of 20 years to resolve. Because the indebtedness has actually increased since the financial crisis and Great Recession, this deleveraging cycle may be even longer.
The deflationists believe that ... no matter how much QE the Fed provides, it won't translate into economic growth if there is no ability to consume due to excessive debt loads. In this scenario, the price of gold and other precious metals...may fall even further.
The second camp belongs to those who see inflation, not only potentially in the future, but currently hurting consumers. In the Oct. 12 Barron's, Jim Rogers opined, "The price of nearly everything is going up. We have inflation in India, China, Norway, Australia -- everywhere but the U.S. Bureau of Labor Statistics. I'm telling you they're lying."
Economist David Rosenberg indicated that if the rapid increase in home and auto prices over the past year were used directly in the CPI instead of the massaged data that is used, CPI would be north of 4% instead of the 1.5% that BLS publishes.
So, which side is correct? Unfortunately, both. There is too much debt, and the pace of economic growth has significantly deteriorated in each decade since the 1980s. Because both sides are correct, the result is Stagflation. If this is the case, the price of gold won't stay down for long.