Silver Breaks $20: Where are the Deflationists Now?

Expected Retuns | September 13, 2010

With the dramatic rise in several asset classes, and most notably silver, you are just starting to see why I pick on deflationists incessantly. Deflationists keep predicting a stock market crash; a collapse in gold and silver; and a substantial rise in the dollar. Of course they have been wrong on all counts. You can be sure that Elliot Wavers are redoing their wave structures ex post facto so that no matter what develops, they eventually will be “right.” I don’t like to get too fancy with my prognostications, because quite frankly, I don’t have to. Buy the dips, sell the rips, and go read a book in the park.

Sorry deflationists, but you are just wrong. Yes the economy will be weak. But there will be no 90% collapse in asset prices. I believe we will see a form of the doomsday scenario so many deflationists predict, but with rising asset prices. I’ve been pounding my fist on the table about this for a long time. What we are seeing is a replay of the 1932-1937 experience- namely rising asset prices in the midst of a Depression.

Deflationists have demonstrated that they lack common sense and just do not understand markets. How is it that you can predict a collapse in asset collapses and a collapse in public confidence while also predicting a rise in the value of the dollar? The dollar is effectively a call option on the productive capacity of Americans. Collapsing confidence will create a panic into private assets. The dollar is about as public of an asset as there is.

Trust me, deflationists are clueless- they just don’t know it yet. When gold hits $1500 and silver hits $25, they will be officially extinct.

Silver

While deflationists deride gold, they are especially bearish on silver since it is more of an industrial metal. Most deflationists I know acknowledge gold as a form of money. Since money does well in times of deflation, you will find very few deflationists who are outright bears on gold (predicting a 90% collapse).

There were some obvious hints that silver was about to break out. Silver was demonstrating real strength by rising against the tide of commodities. Those who noted the consolidation pattern shown below were just waiting for the eventual breakout. The breakout has officially occurred this morning, and I am looking for a backtest of $19.90-$20. I may add at these levels, but it all depends on how the market breaks.

I keep on telling my readers that we are approaching a time of great change. For those who are long gold and silver, this will be a time of excitement. For those short gold and silver, this will be a time of pain.

I’ve been pretty consistent with my forecasts. Buy the dips in stocks unless you trust you trading skills. In that case, you can go selectively short. Buy the dips in gold, but NEVER go short. When I think it is time to buy puts on gold, I will say so publicly. But puts are far different from an outright short on gold; they are much more of a dynamic hedge in my opinion.

I am going to drill it into all your heads for the 100th time. Gold is going to erupt and expose most “professionals” as clueless. We are seeing a collapse in public confidence that will not be resolved until gold goes to much higher levels. These are times of serious change. Those who ignore what is happening in plain sight will regret it.

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