There is literally no limit as to how much money they can print and there are plenty of means to inject these dollars directly into the economy without the help of the banking system (tax rebates, stimulus packages, cash for clunkers, buying government/agency debt to keep interest and mortgage rates low, etc).
Therefore, while deflationists look at the whole story from a hard currency point of view, in this case gold, inflationists look only at the nominal value of a currency. In that sense both camps are right with their predictions! The following example serves to illustrate what we mean by that. Let's assume that the governments and central banks of the US and Europe continue to monetize their enormous debt by printing money out of thin air. Over the long run this will lead to higher nominal prices of tangible assets, such as stocks and commodities. Under such a scenario it would not be inconceivable to see the Dow Jones rally to let's say 20'000, while the price of gold may go to 4000 dollars an ounce.
Therefore, in nominal terms we would clearly have inflation, but when we look at the same scenario in terms of gold, we would have deflation, because the ratio between an ounce of gold and the Dow Jones would have fallen from the current 10-to-1 to only 5-to-1. Let's not forget that at the beginning of this decade the ratio was as high as 40-to-1! In other words, when measured in the only 'hard currency' left, namely gold, the stock market is in a very severe deflation.
Gold is simply a tangible asset that is rare and cannot be manufactured at will like paper money for example. For thousands of years it has been used to force discipline into the various financial systems of the world. But we could easily substitute gold for something else like silver, copper or uranium and the basic principle remains the same. We therefore believe that ultimately even cotton, or 'white gold' as it is sometime referred to, will see its nominal value go up. It may not happen for a while and we will probably see some volatile moves in between, but we are convinced that several years from now all things quoted in US dollars will carry a much higher price tag.
So where do we go from here? The market has pulled back towards the middle of its 55-65 cents trading range, which has now been in force for over five months. Weather and outside markets will probably be the main drivers in the near term and we may see some volatile trading within the old battleground. If stocks and commodity markets continue to weaken, we could see many of these newly established spec longs bail out, which would generate some selling pressure. However, trade buying and mill fixations (there are over 5 million bales unfixed!) should provide solid support between 55 and 60 cents and we therefore believe that the lower end of the trading range will hold.
Whether the market will eventually be able to rally past resistance at 65 cents depends toa large degree on how the US crop turns out. In the longer-term we still see more upside potential than downside risk, but at the moment there is no reason to believe that the market will break out of its trading range anytime soon.
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