The Gold Economy

For those interested in buying gold, a common question arises: Will deflation kill the value of gold? Here is a good article (Why Today’s Deflation Won’t Kill Gold, by Abigail Doolittle) on why gold does not devalue during deflation in real terms.

The article covers a couple of good points. First, gold is a store of value while paper is not. Next, gold’s trend is up and will continue to be. The article points out that deflation of asset values and hyperfination are not mutually exclusive. (In fact we argue they are part of the same process.)

I am a little disappointed in the article’s outlook for gold prices. I think that, overall, the article treats gold like an asset and not as money. It is obvious by even cursory research that gold behaves more as money than as an asset class, and has done so for over 5000 years. To argue otherwise is to akin to pounding one’s head into solid objects, which I don’t recommend.

We continue to remain bullish on gold for these reasons. First, gold is money and as such, will eventually be valued in appropriate terms to fiat paper money creation. This most likely in the $5000 range given what we know about current paper money creation.

Second, in inflation adjusted terms, gold’s previous $850 per ounce peak equals about $2300 in today’s money. And the price is rising as more money is likely to be created by Quantitative Easing round 2, which we believe is soon to be announced by the Fed.

Third, demand for gold is spiking upward, not down. Industrial demand is negligible compared to central bank demand. And sovereign’s like China are publicly asking their citizens to purchase gold as uneasiness sets in about the US problems with debt, which China holds a lot of. A wealth transfer from West to East is happening not only by government policy, but by public demand. This will increase price pressure in dollars on gold.

Fourthly, we know, as GATA and others have exposed, that the price of gold and silver are being manipulated on COMEX and through paper derivatives. To say otherwise would require blatantly ignoring publicly available data otherwise. The CFTC is considering enforcing position limits on gold and silver as they can no longer keep secret the incredible short positions taken by JP Morgan, and to a lesser extent other banks, on the metals.

None of these four arguments points to a lower price for gold. They quite honestly point the price needle for gold straight upward.

The question becomes is the higher price of gold make gold more valuable in real terms, or is gold simply retaining value? We think both mainly because the current price suppression allows holders to invest at a discount to what gold should be trading at in current us dollar terms.

Therefore, in the end, gold will be worth what gold is always worth. But it’s cheap now, so by all means continue to purchase it in line with your portfolio objectives.

Disclosure: No positions, no funds