Deflation Deflation explained

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Those who have something to sell (i.e. everyone who buys advertising) want the news media to sing a happy tune.

So the news media sings a happy tune. "The economy is on the mend" "The housing marketing shows signs of recovery" "Commodity markets are booming."

While it's true there is always a bull market somewhere, it's essential to know the overall state of the economy, especially if you're going to invest hard earned money or make big life decisions like buying a home.

Since 2005, we've been pointing out that the most likely outcome to the current folly in the mid term is not inflation. It's deflation. The news media seems to be finally catching on and mentioning the word - without context or explanation.

The above video is one of the best explanations of deflation out there and why it is the most likely near and mid term outcome.

With the collapse of real estate prices and interest rates on government notes, you'd think this would be a no brainer, but a bad idea (inflation is inevitable) is hard to root out once it gets embedded.

Note: This video was originally posted in 2009.

About gold

At the end of the video, the commentator recommends gold. I agree that if you have cash holdings, a sensible portion of that should be in gold. What's sensible? "Around 10%" is a good place to start your thinking.

Gold should be held as gold, not as ETFs, not as certificates, and not as collector coins. Commodity coins or bars. Period. Yes, there will be a cost to safely storing it. Given that gold is financial insurance (this is not a recommendation to speculate in gold in an attempt to "get rich") secure storage fees are a cost prudent people should be happy to live with.

Also, given the wild fluctuations of price (and the possibility that we might have a big price retracement), it's better to buy a little every month rather than storm in and buy it all at today's prices (posted: October 2010)

What if you don't have extra cash?

Then invest in things that store well and will be easy to trade in the event of an economic dislocation: rice, beans, canned food (keep cycling the food in you inventory, don't let it get too old), ammunition, alcohol, razor blades, and believe it or not, laundry soap.

You use these things daily anyway. Why not become a better shopper on price and buy more than you need for immediate short term use. There is no downside to this.

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Deflation explained

Why it's inevitable

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