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A few readers may have misinterpreted this commentary as a quick reaction to one specific event or another within a few days preceding publication. The Optimist is flattered that readers believe he has the ability to quickly produce a quality work on demand within a very brief time. Alas, the unfortunate sordid truth is that quick work done by the Optimist has little style, and is filled with errors, omissions, and inadequately presented ideas. Resolving those loose ends can take days of editing time. For this commentary, those few days of writing time were spread out leisurely over the preceding three weeks. The Optimist has been intently interested in inflation versus deflation debates for more than 30 years. The 1970s were an exciting learning time, but that environment offered only a limited viewpoint with respect to inflation. Throughout the decade, inflation was ever present, painfully obvious, and persistently increasing. Many of us began to believe that increasing inflation was a permanent fact of life, and we were aggressive in purchasing real assets (i.e., precious metals, commodities, collectibles, real estate, etc.) to profit from the obvious trend. In 1980, Paul Volcker changed the rules of the investment game, and taught us new lessons. By sharply increasing interest rates to higher than inflation, he reversed the previously rising trend of inflation. Although inflation was still much higher than it is now, it then became increasingly more difficult to profit from bullish bets on precious metals. By 1986, I realized that neither the level of inflation nor the level of interest rates was the key to successful investing in precious metals. The actual controlling factor was the level of real interest rates. In a fledging newsletter which I published for only a few months in 1986, I presented a chart like Real Interest Rates Control Gold and Silver to explain why precious metals exploded higher in the previous decade, and then plummeted in the 1980s. Real interest rates provide good guidance about the investment climate in much the same way that a calendar offers guidance about the temperature. Any day in the year can be hotter or colder than the day before, but it is more profitable to bet there will be hot days in the summer and cold days in the winter. With a bias based on real interest rates, the Optimist has “diversified” most of his investments into several precious metals “eggs,” but he keeps them all in the same inflation basket where he watches them like a hawk. Since the success or failure of his portfolio depends in large measure on the relationship between interest rates and inflation, he is intensely interested in the future course of both. Several different people on various websites have authored many articles over the last year emphatically stating as fact that rising debt and worsening employment makes a deflationary collapse inevitable soon. Since the Optimist’s basket of eggs would take a painful tumble if those forecasts are correct, he reassesses his bullish posture every time he reads about the certainty of imminent deflation. Each time so far, he concluded that deflation is not the choice that he wants to bet on until the Fed takes the painful action to push real interest rates firmly into positive territory (déjà vu 1980). That viewpoint continues to be comfortable for the Optimist. He cautions all readers, however, that they should keep an open and inquiring mind about all viewpoints, and they should do their own due diligence as if their portfolio profits depend on it! Those who so clearly see deflation ahead may yet be proven correct. For now, however, the Optimist does not share that vision, and he is content to continue betting that precious metals will prosper until real interest rates return to positive territory. The Optimist wishes good luck to all investors, though he secretly hopes that inflation optimists will score better in this grand game than deflation pessimists!
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