Are we in deflation? If so, will gold still rally?

You are correct that we are in the deflationary period, if you define deflation as falling prices in the medium term. There is also another way to define inflation/deflation and this is the decrease/increase in the prices of goods caused by the changes in the money supply. If you take this definition into account, we are definitely in the inflationary period, as the amounts of money that were created out of thin air recently are enormous. I prefer to use the latter definition, as it is confirmed by statistics, history, and basic economic laws. Statistics show that there is a very high correlation between rising prices and the money supply (click here for more details), which is caused by very basic law of supply and demand. Supply of money increases so its price/value decreases - and since the currency's value is lower, then goods price in it will seem to cost more in the long term.

During a gold standard prices of goods rose and fell relative to each other, but if you buried your money and dug it out after 50 years, it would still buy you more or less the same amount of goods. This means that it maintained the purchasing power, as the money supply didn't change. Naturally, this is a very simplified version of the whole process, as we would need to take the global population and the gold supply into account. The point here is that the prices changed relative to each other throughout the history, but the great erosion of wealth through inflation is associated with periods when the fiat money has been used. This would indicate that it is indeed the big increase in the money supply that causes 'inflation' (ceteris paribus).

The discussion about inflation/deflation is very often more about semantics than economics. This is similar to the answer to the question whether we are in the bull market or in the bear market. We can be in four bull markets and two bear markets at the same time - it all depends on what time frame you look at. We are in the secular bull market it the precious metals, but there are many smaller cycles that need to be taken into account. When I say that I expect the market to go up for a few days, then plunge and after that I believe we will have a strong rally - then am I bearish or bullish on the market? The same applies to the inflation/discussion if one defines it as a general rise/fall in prices regardless of its cause.

What one needs to remember is that no matter how you are going to call the economic period that we are currently in, the large increase in the money supply will sooner or later translate into higher prices of all commodities, especially the precious metals. If you take the long run into account, you will notice that the prices of goods/services/commodities are going up, despite occasional sharp declines. And remember - this is a secular bull market - it has many more years to go.

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