Marc Faber: Gold a possible canary in the deflation coalmine

There was a lot of backing away from gold on Monday.
Goldman Sachs kicked it off by cutting its end-2013 and 2014 gold-price views, its first gold cut since April, to reflect the new post-Fed world reality. Goldman expects a stronger economy and less accommodative monetary policy, and hence lower prices for gold GCQ3 , which investors normally seek out as a hedge against inflation.
Credit Suisse, meanwhile, said gold investors maybe should be ratcheting down their expectations, or at least taking a harder look at them. Gold could get back to levels seen before the crisis, around $1,100 or $1,500 an ounce, Tom Kendall, head of precious markets research told CNBC. That’s because many of the so-called fear factors driving gold higher — such as inflation — have been removed from markets.
Finally, analysts at Citigroup did a little hedging on Monday, saying while they don’t expect gold under $1,100 an ounce, it’s “not an impossibility.”
But there might be something else investors should be considering where gold is concerned right now, especially at a time (at least on Monday) when global markets are collapsing like a house of cards (though gold was getting by with comparatively small losses). Here’s what Marc Faber, editor of Gloom Boom Doom report told MarketWatch in an email.

“Maybe gold is signaling a deflationary collapse of all asset prices. If this were indeed the case I suppose I would rather own gold than government bonds, high yield bonds and equities. If this scenario were to pass it would lead to even more money printing around the world,” says Faber, who was talking about asset price deflation and gold back in March.

Peter Hug, global trading director at Kitco, agrees with this possible scenario. He believes the dangers to the global recovery are on the deflationary, rather than the inflationary side. He doesn’t expect the Fed will move on rates until 2014, but says the central bank is likely to jaw-bone those potentially policy changes to prepare investors.

“The trial balloons are meant to gauge market reaction and so far the selling in the equity markets as been somewhat disciplined. If the damage here accelerates the Fed will suggest that the retraction of bond purchases is not imminent,” says Hug, noting fresh comments from New York Fed President William Dudley who says the Fed still isn’t accommodative enough.
“You would suspect that this would be price supportive for metals and I think it will be, with the caveat that we do not have a major deflationary collapse, which would be harmful to all hard assets in the short term. This would result in increased ( dramatic) stimulus by all central banks which should then propel the metals higher,” says Hug.

Last month (when gold was around $1,467 an ounce), Jim Rickards of Tangent Capital predicted deflation would eventually start pushing up by the end of the year, and if the Fed’s monetary policy is successful and deflation prevails, it’s going all the way back up.
“Deflation is something Japan and the US monetary policy makers fear most,” said Jon “DRJ” Najarian, Senior Economic Analyst at Capital Gold Group in emailed comments.   “If they see either economy backing into a deflationary spiral I think they would, through words and deeds, apply all available stimulus. As I have held for months now, I think the weak hands will be flushed out of GOLD by the end of this quarter, which now is just four days out,” he added.

Source: http://blogs.marketwatch.com/thetell/2013/06/24/marc-faber-gold-a-possible-canary-in-the-deflation-coalmine/