Because my work schedule is flexible, I can go to the gym whenever I have a free hour or two during the day. Usually I go in the early afternoon, when there are typically just a few housewives toning up their abs and thighs, and relatively few men. But whenever I arrive and the place is nearly deserted, why is it that there is just one other locker in use at that moment: #56?

Until recently, I thought that it must be a karmic thing - payback, perhaps, for a crime of revenge that I committed in high school involving a classmate's locker. (Actually, there were two crimes, if harboring an effigy of one's prom-date-turned-cajone-buster constitutes a crime.) Now, though, I'm not so sure that karma has anything to do with it. The other day, when I showed up at number 46, the only other guy in the locker room had his stuff piled on the bench in front of - you guessed it - locker #56. He must have read my mind, because before I could even comment on the absurdity of it -- two guys bumping elbows in an otherwise empty, 5,000-square-foot locker room - he said, "Hey, let me get this stuff out of your way. Crazy, but it seems like every time I'm here the only other person around is using the locker next to me." So, it's not just me after all. Readers?

I've received an avalanche of mail from subscribers following our discussion earlier in the week of deflation, hyperinflation and gold. Over the next several days, I plan to share some of these interesting and enlightening letters with you. My responses are in italics, although I've presented some of the letters without comment.

Paul M. writes:
"I'm not much for astrology, but Jim Sinclair is all over gold, saying it's about to go up. I am one of his avid followers. I certainly hope he is right. Staring at the charts makes me think he may be correct this time and gold is on the way up.

"On the other hand, I am an avid follower of Jeff Kern. I pulled the plug on a LOT of gold equities for myself and my friends -- friends who were stupid enough to have followed my advice and buy gold stocks in the first place -- when Jeff said to get out.

"I have been watching gold stocks go down ever since. Jeff saved me and my friends a LOT of money. Jeff, of course, is still Bearish--very Bearish. And Richard Russell still thinks this could be a deflationary event. I'm thinking the market is about to tank and the gold stocks are just pointing the way. So, I'm long gold futures because I think Jim may be right this time, and I'm out of the stocks because I think they are leading the bear market down.

"So, since you are known as a world-famous expert (someone once told me an expert is someone who lives more than 50 miles away), let me ask: WHAT THE HELL IS GOING ON HERE! Sorry, I shouldn't shout, but this is making me crazy. How can bullion be headed higher with the stocks going down?"

Many subscribers have asked whether I think that mining stocks would fall if the broad averages were to plunge. My guess is that they would - unless, that is, the stock market's collapse were related to some crisis centered on the dollar. That's unlikely, though, at least over the near term. I expect the dollar's eventual collapse to be the climax of a multi-year economic crisis beginning with a bear market in stocks.

Phil D. writes:
"When I was a student at the University of Rochester many years ago, Milton Friedman came to speak. He had just won the Nobel Prize recently after many years of being regarded as a fringe member of the economics profession (if that is the right word for it).

"Someone asked him if the Great Depression didn't teach us we had to expand the role of government. He first thanked the person for asking this question, then told us all he had not planted this person to ask this question but was delighted to answer it anyway. He said that what caused the depression was a failure of the Fed to keep the money supply growing. I assume he argued the same in his book on the monetary history of the United States although I have never read it.

"Bear in mind that monetarist theory judges whether credit conditions are tight or loose not by whether interest rates are falling but whether the money supply is growing. I know you have contended that velocity of money will contract in a deflation, but Friedman doesn't blame that culprit. He says the Fed didn't keep the money supply growing. If they had kept the money supply growing maybe we would have sunk into depression anyway but we didn't go that path so that experiment hasn't been tried yet. If I understand that period correctly interest rates were lowered repeatedly but money was tight most if not all the way down, just as we saw the reverse in the 1970's where interest rates went up in the even though the Fed was always behind the curve - until Volcker came along.

"Your strongest argument, it seems to me, is not that the Fed can't inflate by printing money at enormous rates and buying up all Treasury securities with them (and there are plenty of Treasury securities out there to buy up). Your strongest argument is that such a course is politically untenable. That could also explain why we didn't inflate in the 1930s.

"That, and Murphy's Law, suggest the real estate market is a bubble begging to be pricked. How to reconcile this with a wildly bullish long term chart for gold is the problem. It would be nice to think that gold could rise meteorically while consumer prices fall, but that sounds like something from Lewis Carroll."

I don't see a wildly bullish chart right now for gold, Phil - only a bull market that could keep going for another ten years…or end tomorrow. "Wildly bullish" would be the August 1982 stock-market rally: a cannon shot that just kept on going. But I defy any chartist to look at the technical picture for gold at this moment and give me a reason to believe that bullion quotes are headed to $1,000, let alone $5,000.

From a hidden-pivot perspective, I'd say this would be more likely if gold, even at this presumably early stage of its bull market, were blasting through lesser hidden pivots effortlessly. In fact, rallies continue to stall - not just at hidden pivots, but at too-obvious price points such as $400. If gold were truly set to blast off, it would grab the bullion bankers and their central-bank friends by the balls and rip its way to $500 in no time. Instead, precious metals continue to painstakingly build a base, perhaps uncertain of whether deflation looms, and of what this would portend.

Concerning Friedman, a libertarian icon, he should know better. If he were a true libertarian, he would say that, then as now, massive imbalances in the financial system can only be corrected by letting deflation takes its course. Fed stimulus is interventionism of the most harmful kind, as we are seeing with the steady accretion of debt to levels in the hundreds of trillions of dollars.

As to the matter of the Fed buying up Treasury securities, that wouldn't create inflation in and of itself, it would merely liquefy the banks and other lenders. For actual lending to take place and the hyper- stimulus to work, there would need to be voraciously eager borrowers possessing assets whose value could be inflated substantially to provide collateral.

Housing has served in this role - stupendously - for the last four years. But anyone who thinks the Fed will simply " print money" to get us out of this jam is obliged to explain how their $350,000 house is likely to be worth $700,000 in just a few years. The housing boom is over, and at this point, probably nothing can rev it up again to its peak levels. Of course, in practice, housing values would need to rise even more rapidly than before to stimulative the economy, since it is taking increasing amounts of household borrowing to sustain our consumption-based economy even at near-recession levels. In fact, measured on a quarterly basis, in recent years it has taken as much as $6 of new debt to create a single dollar's worth of GDP growth at the margin. So much for the Fed cranking up the printing presses.

From Bobby E.:
"Just before I read today's commentary, I was on the phone with Tim Wood at the Cyclesman. Part of our discussion was on the dollar and I asked him which way he thought this thing would resolve itself…strong or weak dollar. Tim says things seem to be pointing to perhaps a year of a strong dollar! That is not good news to people sitting on hundreds of gold eagles!

"Given what I have just read from you, ("Hyperinflation? Dream on, Debtors") I 'get' that you seem to be thinking in the same way Tim is, and that Richard Russell's dollar short theory may be just exactly what the future holds. I think you and Tim should talk some and compare notes because a heads-up on a strong dollar to us gold guys would be like knowing when the trap door under the Dow is going to pop open.

"Concluding my conversation with Tim Wood, and this note to you, I am honestly completely baffled as to what to do about buying, selling or holding gold. I told Tim I suddenly feel there is no place safe to be anymore! I honestly feel like I may have to completely re-evaluate everything I've come to believe about what gold can and cannot do! I'm petrified of buying even Newmont now."

As certain as I am that gold will someday soar against the world's bogus currencies, most particularly a ubiquitous dollar, I strongly doubt that the bear will make it so easy for true believers to use bullion alone as a shield against economic cataclysm. I've speculated here that, if deflation takes hold, it could strengthen the dollar, at least for a while, in ways that few seem to expect and almost no one, particularly debtors, wants. Even if you don't see this as likely, it is surely possible and therefore a risk that you'll need to consider.

Fortunately, there are some good ways to hedge the dangers of investing during uncertain times, even when those dangers are grave. For instance, if you believe as I do that an economic disaster just short of Armageddon is possible, then holding physical gold is probably the best way to prepare yourself financially. But even under the most pessimistic assumptions, it doesn't have to be an all-or-nothing bet. Instead, you could consider putting, say, 40 percent of your capital in cash or near-cash, 30 percent in physical gold and other precious metals, and the remaining 30 percent in cheap gold stocks that would give you the leverage of call options -- but without time decay -- if bullion prices should go berserk.

Such concerns are central to the purpose of Rick's Picks, and I would therefore urge all of you to continue asking tough and even outrageous questions during our regular discussions. The Q&A sessions can help sharpen our imagination and perspective so that we needn't face a perilous future frozen with fear.

Rick Ackerman

September 2, 2004

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com