Follow the Yellow Brick Road and Buy Gold

Bill Fleckenstein MSN Money September 4, 2010

How can you navigate the threat of the 'flations'? One option is to follow the yellow brick road and buy gold.

As we head into the homestretch of summer, deflation seems firmly entrenched as the prominent financial theme of the moment, even while, in my view, two other possible outcomes have a higher likelihood: inflation and stagflation.

In effect, that has created an additional theme: how best to protect yourself and your money. I think everyone should be aware of, if not actively pondering, the impact of these phenomena, as well as planning how to manage the risks that the likelier "flations" pose to one's financial well-being.What's up? Only the things you need Concern over deflation, Wall Street's current favorite "phantom menace," has reached near hysterical levels lately, so it was interesting to note that the Producer Price Index for July had gained more than 4% year over year.

In addition, regarding the Consumer Price Index, Jim Stack made the point in his most recent newsletter that the first half of 2010 had seen a 2.1% annualized increase -- this from a highly publicized statistic that everybody and his brother knows understates inflation. That's not to say that certain items haven't declined in price, but such a reading from the CPI is obviously not your grandfather's deflation.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=4834685f-16ce-cb71-9070-532651ec8a39,089ea7cc-71a4-4fec-88f8-a72af214be35,1590a69c-e5c8-4bf5-8ca7-302acd5837a0,4b9e2a9c-4f36-415c-b497-a6c381f6b789,069f4211-3b14-4590-a03c-8b90a07fb5b9,2a9e2f97-d5f6-4c3a-86b6-a38843d47cab,7d6f9a89-ca12-477a-8b6b-7acf14c8bb8b,977e678a-ad6a-41c8-ba3f-cb40dcfab20a", "player.fr": "iv2_en-us_money_article_16x9-Investing-ContrarianChronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=4834685f-16ce-cb71-9070-532651ec8a39,089ea7cc-71a4-4fec-88f8-a72af214be35,1590a69c-e5c8-4bf5-8ca7-302acd5837a0,4b9e2a9c-4f36-415c-b497-a6c381f6b789,069f4211-3b14-4590-a03c-8b90a07fb5b9,2a9e2f97-d5f6-4c3a-86b6-a38843d47cab,7d6f9a89-ca12-477a-8b6b-7acf14c8bb8b,977e678a-ad6a-41c8-ba3f-cb40dcfab20a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Meanwhile, both The Wall Street Journal and The New York Times carried substantial articles about inflationary pressures on their websites Aug. 25.

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The Times story, headlined "AARP says brand-name drug prices up 8% in 2009," starts by noting: "A new report on retail prices of brand-name drugs shows that the 217 products most used by older Americans increased by an average of 8.3 percent during 2009, the largest increase in years."

Meanwhile, in The Journal, "What's the beef? Food-inflation fears" was the headline that caught my eye. The article begins: "Cattle prices are soaring toward records, pushing up the cost of beef in grocery stores and adding to the risk of a broader wave of food inflation." In addition to meat, there are plenty of foodstuffs, including coffee, cocoa, barley and wheat, as well as nonedible products, such as cotton, that have been soaring in price.

How to invest in gold

The fact is that the cost of living is rising on many fronts, including almost anything touched by a government entity, where taxes and use fees continue to ratchet up. Of course, none of the items that are increasing can be linked directly to monetary policy, so folks continue to look at (declining) asset prices, which are more closely aligned with monetary policy, and see the environment as one of deflation. Yet if they looked at their checkbooks, they would have a completely different opinion.

The irony is that these same people didn't consider rising asset prices during our dual bubbles to be signs of inflation.

As I said two weeks ago, I believe it is more likely that we are in for a period of stagflation, which is an entirely different world from deflation. With stagflation, interest rates eventually rise, and bonds do poorly. Companies benefit when they have pricing power and barriers to entry that keep potential competitors away, as do companies that are growing rapidly.

In such an environment, people eventually come to understand that their paper money is depreciating in value over time, so stores of value (which protect against the impact of government money printing), such as gold, benefit as well.

Continued: Is gold really the Fed's guilty treasure? More from MSN Money

The next bubble is in punditry

Should you buy gold coins?

The cost of this time down: Stagflation

A patently obvious way to add jobs

Is this a double-dip recession?

1 | 2 | next >

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=9.189189; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=37;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesInflation, stagflation and you 09/03/2010The next bubble is in punditry 08/27/2010Cost of this time down: Stagflation 08/20/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 1CommentNewestOldestBestWorstControversialb_capp12 hours ago

You couldn't pay me money to own SLV ( silver fund ) or GLD ( gold fund ) as both are 'pseudo' backed by the financial industry. There's no telling if the owners of said funds are actually packing their vaults with a corresponding amount of gold and silver when someone buys a share of SLV or GLD. If a JPM 'big boy' bank goes belly up ... even though it might cost me in five years ... $5,000 to buy a Rolex watch at the local pawn shop that doesn't work but is made out of an ounce of gold ... GLD might only fetch a 'penny a share' if the financial sector folds.

Which is why the Federal Reserve is monetizing debt right and left to insure the financial sector doesn't fold. Very soon ... no later than this Fall of 2010 or Spring of 2011 ... the Fed is going to have to do more Quantitative Easing ... which for folks who don't have a clue ... means the Fed is going to pay 100 cents on the dollar for assets sitting on a JPM, C, BAC, and WFC balance sheet ... so Wall Street can keep DJIA above 10,000.

What are those 'big boy' bank assets, you ask? They're home loans, commercial real estate loans ... basically any loan a bank made over the last ten years that isn't being paid on time like it should because the local business is bad or the homeowner lost his job.

We all know this is crony capitalism ... and the longer the Fed plays this game the more dire the final inning of the game will be ... let's all hope Japan goes belly up before America does. Try shorting SNE or EWJ or even TM ... I think investors have a better chance of making money by shorting Japan than by owning funds which 'pseudo invest' in gold and silver.

And finally ... what's going on in America isn't late 1970s stagflation. The Federal Z report says it all ... overall consumer debt continues to shrink UNLIKE THE 1970s ... which is why the Fed chief Bernanke will NEVER RAISE INTEREST RATES AGAIN. And by November 2010 most Americans will know the American economy has been crammed into the same pigeon hole as Japan and the Eurozone ... because all three economies are DEPENDENT on cheap foreign oil imports ... which aren't cheap anymore ... and so all three economies will keep interest rates at near zero percent to keep their respective economies 'head above the water' ... and take a SLOW RIDE down the drain ... with Japan leading the rest down the slide ... because Bernanke doesn't want to solve the oil problem.

If he did want to do something about the coming global energy crisis ... Bernanke would have let GM, F, and even TOL ( houses constructed today waste energy right and left ) go out of business ... so that those people who know how to solve the 'ernergy problem' ... WOULD BE GIVEN THE CAPITAL TO DO AS SUCH.

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How to invest in gold

The irony is that these same people didn't consider rising asset prices during our dual bubbles to be signs of inflation.

Follow the Yellow Brick Road and Buy Gold

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