The Bank of Japan has announced for the third straight month that signs of grown are on the horizon.  The Japanese consumer index is still down by a couple of percentage points from last summer, and the deflation is expected to continue well into 2010, but nearly every other indicator is pointing to a gradual recovery from the world wide economic slowdown.

The Bank of Japan’s report, released in late October, shows that they expect the economy to continue to be slow until about March of 2010.  They are hesitating to increase the liquidity of the credit markets until the right time, which may echo what the US has in store for interest rates in 2010.  The interest rate hike will likely come in March or April in Japan, just as it likely will come at the same time here.  This means the potential end of the road for the deflationary period we have been experiencing for nearly a year and the beginning of an inflationary period.

If the stock market stays strong, certain hot commodities like gold and other precious metals could take a hit around this time.  If inflation does occur, it will likely boost the DOW’s already bullish trend and send metals plummeting.  If the DOW takes another major hit between now and April, metals will most likely still be king.  This would ring true especially if there is a massive move to an inflationary period, where metals would be investors’ best bet against wealth destruction.

The Bank of Japan voted on November 20^th to leave to prime rate at 0.1%.  This comes on the heels of the US announcing a possible Fed audit and the intent to raise interest rates in the mid term to help combat the possibility of out of control inflation.  The Bank of Japan’s decision reflects the sentiments of many other major economies of the world- that liquidity in a time of deflation could get out of hand through widespread and uncontrollable inflation.

The bet on the street is this:  Will the DOW continue its trend unabated, giving gold and other precious metals and investment hedges the red light?  Or will the DOW falter under myriad different scenarios of economic stalling, giving more room for the precious metals to run?  In either camp there is an argument and shreds of truth.  It might all hinge on the results of the retailers this holiday season.  The American public is excited and looking for any sign, any reason, any excuse to jump back into the stock market from the sidelines.  The retail numbers will tell a great deal about whether or not we are in for another year of deflationary economic action or more likely, an inflationary period.  Precious metals are hot right now and for good reason.  It may be a good idea for every investor to get their hands on some gold or other precious metal right now as a hedge against the possibility of more economic hiccups.  The Bank of Japan decision is telling, but the real proof will come in the form of retail sales.