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A one-ounce gold panda coin from China is shown at K. Smaltz Inc. in Garden City, N.Y., in a file photo

ED BETZ

Robert Prechter Jr. has an independent streak that puts him at odds with the crowd at times. A case in point: his resolute refusal to join the bullish stampede into gold that has driven its price above $1,000 (U.S.) an ounce in recent months.

Shunning the herd is perhaps what one would expect of Mr. Prechter, a member of the Triple Nine Society (open only to persons who have scored above the 99.9th percentile in IQ tests, higher than Mensa). Following his own star is indeed what he has always done, as is apparent in the route he took to become an expert in the technical analysis of financial markets and the publisher and editor of the Elliott Wave Theorist newsletter, based in Gainesville, Ga.

After graduating from Yale University in 1971 with a psychology degree (and deciding the life of a psychologist was not the path for him), he played the drums professionally in a rock band and, of all things, studied stock charts. Then he talked his way into a job as a technical analyst at Merrill Lynch in 1975 and branched out on his own as publisher and editor of an investment newsletter in 1979.

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Read more about investing in gold in Trade by Numbers:

  • Gold could go higher, but that doesn't mean it can't fall first
  • Mining Canada's gold producers for hidden value
  • Discussion: Investing in precious metals?
  • A bear on gold when the rest are bullish
  • Buying gold: An investor's guide


Mr. Prechter just doesn't see the U.S. government's Mount Everest of financial obligations precipitating a tsunami of hyperinflation, as the gold bugs envision. Neither does he see the U.S. dollar spiralling downward against other currencies and giving up its status as the world's most used and held currency.

Not yet anyway because Mr. Prechter first expects a deflationary vortex to emerge from the ocean of credit on which the world economy floats - by as early as 2010. An environment where nearly all prices are falling is not conducive to the price of gold taking off. Its primary appeal to investors, after all, is as a hedge against inflation.

While gold bugs are convinced the U.S. government will ignite hyperinflation by paying off debt via the printing press, Mr. Prechter thinks we are at a critical juncture where the issuance of new quantities of paper money has lost its customary stimulative impact on prices. "The Fed will be pushing on a string," he says; it will be powerless to halt a general decline in prices at this stage.

For one thing, the U.S. bond market stands in the way. If more concrete signs do emerge that the U.S. government intends to devalue its debt, bond holders can be counted on to dispose of substantial portions of their holdings, which will cause bond yields and interest rates to escalate. Rising rates are, of course, deflationary since they dampen private sector demand for loans.

Another thing that will neutralize the Fed is "a change in psychology," says Mr. Prechter. As Elliott Wave patterns - the patterns of market price trends - are signalling, the social mood in the U.S. and elsewhere is transitioning from optimism to pessimism. A more conservative attitude toward debt will lead lenders to supply less credit and borrowers to demand less. End result: a halt and even a reversal in the credit expansion process.

The Oct. 18 edition of the Elliott Wave Theorist newsletter calls for gold to top out near current prices. Reasons Mr. Prechter offered:

Silver continues to lag and provide "non-confirmations" in its failure to break above its all-time high and its March, 2008, high (both of which gold has done).

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If gold were to match inflation since 1933, it would have risen by 25 times instead of the current 50 times.

Gold is beginning to look like a crowded trade - even the Wall Street Journal, CNBC, and the Washington Post "tell you to buy."

Virtually everyone at the New Orleans Investment Conference he recently attended "expressed super bearish views on the U.S. dollar."

But saying Mr. Prechter is bearish on gold may be putting it too strongly. The bearish label may have fit in past years but in a September interview with Financial Sense News Hour host Jim Puplava, he seemed to soften his stance somewhat.

Mr. Puplava asked if he wished he had changed anything in the second edition due out this month for his bestselling 2002 book, Conquer the Crash (all that's new is the addition of over 150 pages containing Elliott Wave Theorist commentary from 2003 to 2007 and updated lists of U.S. financial institutions and contact services). He replied:

"If I were to reconsider one comment it is the idea that gold would have difficulties during the [deflationary period]….there was so much inflation from 2002 to 2008 that it ignited all the markets, most of which have since collapsed …. But gold is [now]holding up. It went up the least relative to everything else and so it's probably going to hold up pretty well during the deflationary drop. But I think it's going to disappoint the people who think its going to $5,000 or $10,000 an ounce. That may happen after deflation is over."

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