The flipside of crisis is opportunity.

Well if you want to make the giant upcoming opportunity work for you than you better watch the (at first) subtle move the global economy will experience over the next 6 to 12 months in the process of turning deflation into monetary inflation, turning into price inflation. For those of you at odds with the terminology, let me first explain the principles.
Over the summer, when hedgefunds covering their losing positions pushed oil toward $150 a barrel and soon a gallon of milk reached $5 at the grocery store, and a gallon of fuel $4 plus at the pump, all you heard was inflation. Deflation wasn’t even part of anyone's vocabulary, except for some "insiders". Bernanke and Paulson turned that around in a hurry and as a result of a massive increase in money supply, various scenarios come into play.

Today, with oil falling to 40% of its peak price a couple of months ago and commodities and raw material prices virtually collapsing, discussion of the “deflation threat” is now front and center.

So, what scenario should we expect in the months and years ahead… inflation or deflation? And how would these scenarios affect the precious metals?
On the side of deflation, we are experiencing the greatest contraction of credit ever. And even though the supply of money has been increasing at the fastest rate in history, it has not kept up with the capital destruction and deleveraging in the equity and credit markets. In the last two months more than $16 trillion has been erased from global stock markets.

Not really deflation in the strictest sense however. Deflation is defined as a systematic fall in the general price level as a result of a drop in the money supply. Real estate, stocks and asset values might be plunging, but these do not constitute “general price levels” in the economy. And certainly the money supply is not decreasing. On the contrary. On the side of inflation, we must distinguish between monetary inflation (an increase in the supply of money and credit) and price inflation (rising prices in the general economy).
There is no question that we are going to see monetary inflation. The massive printing of new dollar bills makes monetary inflation a reality. In fact, during a period of about six weeks in August and September, the monetary base of the United States increased by an unprecedented and previously unimaginable 20 percent. We are currently witnessing the largest concerted injection of capital in history.

So Deflation is on the menu right now, due to the massive deleveraging that is going on. But this process will begin to wind down in say 6-9 months… and when it does, look out. The global measures to re-inflate the money supply and credit will put inflation back on the map. As the monetary stimulus begins to make its way down to the general economy, inflation will begin to soar. Interest rates will soar and function as an early detection instrument for potentially bad loans.

It usually takes about 12-18 months before monetary inflation leads to price inflation. Usual may not mean a thing in these unusual times but fact remains that many investors miss the connection, expecting one to lead to the other right away. We will see continued “deflation”, especially in excessive bubble markets, as the excesses of the previous boom get worked out of the system, but make no mistake about it, price inflation is coming. And with it, a much lower dollar and soaring prices for the precious metals.

And let's not forget about the massive money printing operations that need to pay for Social Security and Medicare obligations. Any way you look at it, the dollar is toast in the long run.
History has told us how gold and silver perform in a hyper-inflationary environment. Quite simply, as money become more worthless, precious metals become more precious. But just to play devil’s advocate, let’s assume that we are entering a protracted period of deflation. How would gold perform then?

In a deflationary environment, cash is king. And while some might see gold as a commodity, it is not. It is money and the masses are beginning to wake up to that fact. In deflation, the purchasing power of cash rises. And since gold is the purest form of money and the ultimate safe haven, it too should rise.
Gold stocks should also do well in a deflationary environment. That’s because the production costs for these companies would go down significantly as energy costs and industrial demand decreases, while the value of their product (gold) remains steady or rises, causing profit margins to soar.
In my opinion we are headed toward a hyper-inflationary depression in the years ahead with a very iffy final outcome for the dollar. In either case – inflation or deflation – gold and silver win.