The Deflation Trade Is Over

13 September 2012
Ben Bernanke announced unlimited moneyprinting at 12:30 PM EDT today.
Joe Weisenthal has called it a "game changer." He is correct. Click here for the key text from the Fed statement and for Mr. Weisenthal's quick take.
What does it mean that the deflation trade is over?
There is no longer any cap on US moneyprinting. Further, the Eurozone has also committed itself to a moneyprinting-based strategy. Inflation will prevail. Long-term interest rates will rise (despite the massive demand-boost of Federal Reserve long-term securities purchases of $85 billion per month - a trillion dollars per year!).
Gold investors have rounded Cape Horn. For the past 6 years, deflation fears have created vicious headwinds for the precious metals sector, and destroyed the market value of gold and silver miners, explorers and mine developers. As of today, that has changed, for all practical purposes permanently.
To switch analogies for a moment, this is the gold tsunami. It is now unstoppable. Gold will just rise and rise and rise as central banks and governments everywhere shred their currencies to make continued spending and debt repayment possible.
I could write pages and pages on this topic, but consider this the executive summary.
I may not have much more to say about the gold market after today. Clear sailing on smooth seas under a sunny sky with a steady tailwind isn't headline news. It is just a forecast for fair weather for years to come for gold, silver and precious metal mining investors.
We aren't there yet, but we are on a steady course, sailing under ideal conditions.
Interestingly, most investors are not positioned for the best of all possible worlds for precious metals. If you are not, you had better get there.
Gold has been the best-performing investment of the past decade. Looks like we've got another decade to go!
The chart below shows the ratio of the Canadian TSX Venture Exchange Index (CDNX) to Gold (priced in US dollars). The CDNX is dominated by precious metal explorers and early-stage mine developers. It was destroyed relative to the value of its underlying assets (gold and silver) by the deflation-scare and collapse of 2007-2009, and remains at its lowest-ever relative levels today (it fell to its all-time low of .7203 only on August 31, 2012 - that level will never be seen again). Note that if this ratio returns to its historic (pre-2007) range of 2.8-5.14, that would represent an appreciation of the market value of this index of 278% to 559%. With the deflation scare probably permanently over, that is perhaps not an unrealistic expectation. Think about it.
Enough said?_