This week we have the pleasure of introducing the dynamic team of Eric and David Coffin. These brothers run HRA Advisory and have had tremendous success predicting market movements over the past 25 years. Much like our team at Pinnacle Digest, the brothers have discovered great profit opportunities in the resource market. Eric and David both have their own set of skills and backgrounds with David focusing on the geology and Eric on the finance side of things. Together they are both key affiliates to Pinnacle Digest and we had the pleasure of catching up with them this past week to get their take on the markets and commodities.

PD: With government spending still rampant, and the US Dollar continuing to slide, what do you think poses a greater threat to our economy, inflation or deflation?

EC: In an overall sense, deflation is far more dangerous for a heavily indebted economy. It's also a more likely near term outcome unless the Fed can engineer a safe exit from the debt deleveraging that is now ongoing. Long term falls in asset prices that accompany deflation make it much more difficult for an economy to deleverage since selling assets has diminishing returns and debt balances remain constant. Deflation also tends to increase savings rates due to deferred consumption but the "slow or no" growth rate that results is a heavy price to pay. Deflation is also notoriously difficult to extract an economy from once its entrenched, especially when the central bank has already used up its magic bullets (interest rate cuts). Japan is the poster boy for this situation and, trust me; we don't want to go there.

Inflation creates victims too but an economy with plenty of external debt has some great advantages. By inducing monetary inflation, a country that has virtually all its debt in local currency like the US can effectively write it down by paying in cheaper currency. I think monetary (money supply) inflation is likely to continue in the US and Europe in any case. I don't believe they will be able to turn off the tap and end quantitative easing in the near term. There is plenty of sludge on the books of banks and other financial institutions that still needs to be cleared out. Since the world seems more than willing to lend the US money at rock bottom rates I see no reason Washington would not go down this path. That doesn't necessarily mean inflation in terms of rising prices any time soon; there is too much slack in the G8 economies to make that likely. While I know this vision horrifies many of my hard money friends I would much rather see the US take this route. If it becomes necessary it would always be possible for the Fed to clamp down if it has to since interest rates are so low. Not painless but easier to do than reversing a deflationary spiral.

PD: Many subscribers to our site and investors abroad feel gold should be trading above $1500 or even higher, why do you think gold hasn't performed the way many expected it would in 2010?

EC: Well, I can't speak to other people's perceptions but so far gold is doing pretty much what we expected. The gold market has been changing over the past couple of years. There has been a tug of war between increased investment and safe haven demand and falls in jewellery demand (which is a substantial part of the market) as prices rose. There are also several cross currents in foreign exchange markets. Not everyone thinks in US Dollars and it's only recently that we have seen gold advancing in virtually all major currencies, the best sign of a true bull market. Going forward, it looks like we will continue to see demand for gold as an investment and portfolio anchor increase though there will be wild short term swings as fear buying waxes and wanes depending on the state of the equity markets. On the supply side, the mining industry will continue to struggle to meet demand. This probably seems counter intuitive to those that don't know the mining business but finding good large gold deposits in mining friendly jurisdictions gets tougher all the time. Add to that the fact that central banks have gone from supplying 500+ tonnes per year out of their vaults to being net buyers and we think the market is set up to be at least balanced and probably stronger for some time to come.

PD: In respect to gold, where do you believe investors will find the greatest upside (gold mining stocks, ETFs, or physical gold)?

EC: It's a good idea for anyone to have some gold in their portfolio. It's a great currency hedge and portfolio anchor. Though we are positive on the gold market we are not expecting huge percentage gains in the gold price. Our focus since we started publishing the Hard Rock Analyst newsletters 15 years ago has been exploration and development level stocks. You generally get more leverage with gold stocks than with gold itself, since gold producer earnings should rise at a higher percentage rate than the gold price itself when bullion prices are going up. Better still, if you can find companies in the preproduction space that can discover and grow a large gold resource through exploration over a relatively brief period that will give you the best leverage of all. When the market was bottoming last year David and I broke from the crowd by deciding we would seek out that kind of high leverage explorer, rather than focusing on small producers like the rest of the market. We chose four companies that generated an average gain close to 300%, largely due to discovery success. We expect the market to be a dangerous place for some time to come but as long as precious metal prices remain relatively firm we think discoveries will continue to be rewarded and provide better upside leverage.