With deflation or an environment of falling asset prices gripping global markets since last July, the whole gamut of inflation-based assets are now “On Sale” for the first time since late 2001. Many commodities and resource stocks have crashed more than 50% over the last six months.

Though there’s no hurry to lunge after depressed commodities now – except gold and silver – the time to aggressively buy these assets is approaching.

In 2008 commodities posted their first calendar year loss since 2001. Only a handful of raw materials posted a gain in last year’s market massacre, including cocoa and gold.



The CRB Index, the most widely followed commodity benchmark, remains 52% below its all-time high in July 2008. The biggest constituent of the CRB and all commodity indices is crude oil, down 70% from its all-time high last summer.

In addition to commodities, other inflation hedges are also in the bargain bin. These include TIPS, or Treasury Protected Inflation Securities, REITs or Real Estate Investment Trusts and most natural resource companies, including gold stocks. Some inflation hedges – namely TIPs and gold stocks probably bottomed in November.

But in order for these and other inflation assets to start a meaningful rally we need to see signs of waning deflation – and that’s not likely until the upcoming U.S. spending package hits the real economy.

President Obama has earmarked $825 billion dollars’ worth of spending, including tax breaks and massive infrastructure spending to boost jobs.

Over the next 12-18 months it’s highly probable that the American economy will react positively to this spending spree. Whatever the final number, it’s bound to lift GDP for at least a few quarters, similar to FDRs first New Deal in 1933.

Starting in mid-1932 the Dow began a historical bear market rally of unparalleled proportions, bottoming in June 1932 at 41.22 and then skyrocketing more than 300% until it started crashing again in 1937.

Obama might inherit a similar rally as hundreds of billions of dollars feed through the economy by 2010. If the economy starts growing again in 2010 then stocks will lead a recovery, probably sometime in 2009.

Still, major structural challenges face the United States with residential housing the most important variable in this recovery process; until real estate prices begin to stabilize the economy won’t find a solid footing – even if accompanied by waves of government spending. The source of deflation lies in real estate, including the piles of junk created by Wall Street called synthetic mortgage-backed securities.

How do you know if deflation is phasing out and it’s time to buy inflation assets?

I’m watching several indicators for direction. These include:

• Housing Prices • TIPs • Treasury bond prices • Gold • Oil • The CRB Index • A Weaker Dollar

For now only gold is heading higher as it approaches important technical resistance levels north of $900 an ounce.

Gold is rising for a combination of reasons and not just because of future inflation fears fanned by a monster spending spree in Washington in 2009-2010; it’s also rising because the global exchange-rate system is faltering as most industrialized and emerging market governments pile large swaths of debt to finance economic growth in a severe recession.

Gold is the only asset outside of the credit system that is no one else’s liability. Along with supply deficits in South Africa and flat-to-declining production in most countries accompanied by booming investor demand, gold prices should top $1,250 in 2009.

I suspect it’s probably too early to buy most natural resources even at these low prices. That’s because deflation is still accelerating, growing stronger lately as credit destruction continues and bank equity evaporates. Real estate prices are still in a freefall. The stock market has not bottomed and, until it does, commodities remain hostage to dollar strength and global deleveraging.

But if you believe the global financial system will survive then it’s inevitable that inflation will be the endgame. For now, gold should be at the core of every investor’s portfolio regardless of age or risk.