MARKETS

For the first time since 2007, investors have multiple ways to succeed this year. Understanding how the lingering effects of deleveraging are colliding with emerging forces of inflation will now define your investing career, writes MoneyShow Chairman and Founder Charles Githler in this exclusive commentary.

The worst is over for investors, and an improving environment awaits us in 2012, according to the MoneyShow experts who proved most accurate last year. Nor will the European sovereign debt crisis whipsaw the markets with last year's ferocity.

The bad news: "our old friend," inflation, is still on its way back.

Its return was our top forecast last year. But the European crisis postponed the comeback, the same way it frustrated predictions for an equities rally, $120 crude, a spike in interest rates, a Chinese boom, and a pickup in mergers.

The euro's weakness helped bear out forecasts for surprising dollar strength and a record gold price, though bullion pulled up well short of the $2,400 per ounce prophesied by our source a year ago.

The call for a rebound in municipal bonds proved spot-on, with the iShares S&P National Municipal ETF (MUB) rallying 18% from its 2011 trough to last week's peak.

When inflation returns, new market manias will emerge and the engorged bond bubble will pop. Monetarists and sage investors warn this is only a matter of time: "Money supply creation is the definition of inflation," said Nobel laureate Milton Friedman, who keynoted several Money Shows during the 1990s.

Milton Friedman
Milton Friedman: "Inflation is coming," Nobel Prize-winning economist told Money Show audiences. Money creation can create growth in the short term, but always creates inflation longer term.

The global money-printing spree over the last three years has been nothing short of colossal: $500 billion in China, on top of $1.85 trillion in the US-which may not be finished-and $2.6 trillion more is required in Europe, according to economist David Malpass. Malpass still worries about "an implosion" of the European banking system, which is almost four times larger than its US counterpart.

Matthew Lynn of MarketWatch argues that gold can't lose. Either the European Central Bank gets busy printing currency to finance bulk purchases of ailing sovereign bonds (which have admittedly performed much better recently), or else the euro will suffer a chaotic breakup.

The extra currency is likely to seek out stores of value. And, under the worst-case scenario, money hoarders might also seek to convert their paper into bullion.

The good news: markets expect Europe to avoid a complete financial collapse. The bad news: a wave of inflation and new asset price bubbles is on the way. But that's tomorrow's problem (and opportunity). Investors who understand and prepare their portfolios will survive and profit from the coming economic transformation.

The timing of this shift is tricky to predict. Our generational problem-the massive overhang of public and private debt-has produced powerful deflationary forces, as in Japan and here during the Great Depression. The excess debt is a heavier burden than the 1970s inflation, and its effects will be felt for most of this decade.

1. Deflation to Inflation
This is the leading trend to monitor, because its arrival and extent will surprise most investors, who have, after a 30-year period of disinflation, come to expect more of the same, as well as ever-lower interest rates.

Markets react sharpest to surprises-witness last summer and fall, when the Dow would crash, then jump hundreds of points based on news from Europe's debt crisis "front."

This is such an important and under-covered investment topic that we have dedicated a keynote panel to it on February 9 at The World Money Show, titled "Deflation to Inflation and New Market Bubbles: The 2012-2014 Investment Roadmap." You can watch, hear, and meet Senseless Panic author Bill Isaac, Age of Deleveraging author Gary Shilling, top economic forecaster David Wyss, and our favorite political commentator and economic and tax policy expert, Steve Forbes.

The winners coming out of this tricky chapter will be those who can tell the difference between a false start and the "real deal" when inflation finally re-emerges from massive currency debasement. Keep your eyes peeled on three markets, starting with the largest: the US Government bond market.

The 30-year US Treasury bond was still hovering below a 3% yield as we started the year. The transition will start if the long bond's yield successfully breaks above technical resistance at the October 2011 high of 3.45%, according to MoneyShow's "Charts in Play" senior editor Tom Aspray.

"Then, a weekly close above 4.85% would end the long-term secular decline in interest rates," he says.

Copper will be the second harbinger of a global recovery and the return of inflation. Because of its widespread use in cyclical industries such as housing, the red metal is said to "have a Ph.D. in economics."

So far this year, copper has contradicted bonds, breaking to a four-month high in January. If the copper price breaks above its 2011 high of $4.58, we are off to the races.

Gold is a third tool to confirm the turn. As with the oil markets, external factors often move gold's price, since governments hold large reserves.

Ever since I started watching gold in the 1970s, governments have been prone to shock markets by selling enough to depress the metal's price. More recently, central banks in emerging markets have bought gold to diversify their reserves away from the US dollar.

To the surprise of many, gold soared as history-making deflationary forces caused a currency and sovereign-debt market panic. A false alarm as an inflation omen?

Use gold as part of your inflation weathervane-combine gold with oil, copper, and most importantly, those yield "price points" of the 30-year Treasury. Taken together, they will provide empirical "proof" that a break from the long downward slog is finally materializing.

Ironically, this generational turn will almost certainly come amid broad skepticism and with surprisingly little fanfare. The SPDR Gold Trust ETF (GLD) price point to watch is $1 above the 2011 high of $186, which is equivalent to a $1,900 gold bullion price. Calling for a big bull market in gold was part of the characteristically sage forecast last year by newsletter and investment conference pioneer Harry Schultz.

NEXT: 2. Financials Finally Recover.Remember 2009?

Tickers Mentioned: GDX, GDXJ, IBB, FBT, EDV