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"Devil of Deflation Will Snuff Out Gold," Minyanville's Harrison Says

Posted Apr 30, 2009 03:03pm EDT by Aaron Task in Investing, Commodities
Related: GLD, GDX, ^HUI, TLT, TBT, UUP, SPY
With the Fed pulling out all stops to fight the financial crisis, the "spectre of inflation" is driving the financial markets currently, says Todd Harrison CEO of Minyanville.com.

The Fed is keeping the printing press on overdrive and fear that will lead to runaway inflation has helped propel the recent stock market rally, kept a bid in gold prices and put upward pressure on Treasury rates despite the Fed's efforts to keep them down.

But "without the velocity of money and with the demand destruction [that's occurring] it's going to be hard for inflation to catch its footing," says Harrison.

He puts a 25% probability on the potential for a (true) hyperinflation scenario to emerge down the road, but believes the risks of deflation are more predominant today.

If he's right, the investing implications are for continued strength in the dollar and Treasuries, an end to the stock market's rally (as discussed here) and weakness in gold, which many view as the ultimate inflation hedge.

"Gold evangelists make a valid argument that it's the only store of value in a world of fiat currencies," Harrison says. But the metal's recent price action shows a series of lower highs, making a "defined downtrend," he notes. Gold has important technical support in the $855-$865 area but Harrison believes "the devil of deflation will snuff out gold" and it will ultimately trade below $700 per ounce before the inflation-trade really kicks in.

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