Expectations Of Deflation

Shifting gears over to the commodity markets, Prechter does not expect to see any major bottoms in price near term.

"We experienced increasing inflation into early 1980," he explains. "From that year forward, we have enjoyed disinflation and the stock mania. In Asia, the markets collapsed and they are deflating. As for the US, I'm anticipating the onset of deflation and the end of two decades of disinflation."

He points to gold's recent push to 20-year lows and the breakdown of the Bridge/CRB index as "early warning" signs of the impending deflationary environment.

When asked whether he sees global money flowing into Japan from the US, his answer is no: "A lot of people have a misconception that if money goes out of one market, it has to go into another. In a deflationary environment, almost all assets go down. Historically, we've tended to see all areas of the western world deflate at the same time. The ‘money’ just disappears."

Looking at current conditions worldwide, he thinks that "the decade-long deflationary environment in Japan was an early falling domino."

Despite his expectations of deflation, he doesn't necessarily see the bond market as a safe-haven spot for cash.

"Most people say that if you expect deflation, you should buy bonds," Prechter said. "This is true if you can buy bonds that will remain AAA.

"In the 1930s, US government bonds underwent a short shake-out, but they basically held their value. They were issued by a strong government and in a very small quantity compared to today."

He points to interest rates at 15% in the late 1970s and says, "The overall rate of inflation is slowing. When that crosses zero, we will have deflation."

Returning to gold, the first market Prechter began charting with the Elliott principle, he said, "for a couple of decades, I've had a long-term downside target in gold and I think we will get there."

Although he declined to specifically identify his target, he offered that it was "below $200 per ounce," adding, "as soon as we reach the depth of the deflationary move, I think gold and silver will be the bargains of a lifetime."

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