One of the things that I just LOVE about gold is that you just can't make a lot of it, I use the word make in loose terms....Which is precisely why gold is gold...(and silver too).

But in the gold money discussion I'm pretty sure that there is a missing link studying gold, and productivity, and then taking that to the monetary price of gold, and then to the price of goods, and then to deflation.

Here is the thesis in a nutshell: Gold is essentially a fixed monetary commodity, goods are not fixed in supply, fiat money is not fixed in supply either. Therefore, discussions that look at gold vs fiat only and ignore the productivity side are oversimplifications. Those over simplifications lead to miscues on timing gold's price movements. Not only short term, but long term too.

The typical inflation argument goes as follows: fiat is growing out of control, so gold skyrockets. But, while the value of gold skyrockets intrinsically vsvs fiat, all things being the same, the price does not necessarily skyrocket. What is happening is an elastic effect, that waits to be manifested once the conditions allow it.

See, the price of gold skyrockets if productivity stays the SAME.... and then fiat is printed like mad.

Let's take a basic example:

Ten widgets cots 5 dollars each, in year one. To buy ten costs 50 bucks in year one.

A year later, the price of making same widget drops in half. Now during this time, we also have fiat inflation of say 10 percent.

Now if one ounce of gold buys ten widgets in year one, but 20 in year 2....gold purchasing power vis-à-vis widgets has doubled....effectively.

But perhaps all the other prices stay the same... so its just vis-à-vis the widgets.

Now for the other goods, monetary inflation has reduced the purchasing power of fiat by 10 percent, so the dollar will now buy about 90 percent of what it could have.

Now gold is still able to buy everything at the same cost vis-à-vis year one.

Now if we are to take the price of gold and compare to the price of widgets......it will buy exactly twice as many widgets, thus it effectively has increased in value vis-à-vis the widgets.

The fiat buys more widgets too... but at a rate of say 90 percent more, not 100 percent more.

Now as long as there is demand for widgets, gold is able to buy more, but its inflationary relationship with the fiat is masked 90 percent AS LONG AS THERE IS A DEMAND FOR WIDGETS.

So while the value of gold is rising vs. the fiat, most of its increase in purchasing power is in terms of widgets, not in terms of fiat. So.... the price stays down and does not reflect the deflated value of fiat, or at least does not reflect all of it......

Now take this to the example of the economy at large, and say that there are indeed large increases in productivity.....

As long as there is demand for the goods and services overall, the price of gold does not rise anywhere near to the deflated value of the currency, that is the price of gold in the deflating currency does not keep pace, but is masked heavily.... However, in terms of purchasing widgets, gold performs right on the money keeping its value till the cows come home.

What is happening here is that while fiat inflates, as long as it does not reach hyperinflationary rates and there is sufficient demand, then gold's price rises vis-à-vis fiat is masked heavily. However, hyperinflation, (that would be inflation roughly in the 12 to 17 percent range for the low grade version) never kicks in.

Now when hyper inflation does kick in, well, all that built up lag of gold vis-à-vis the fiat is caught up in a few moments, and we see those explosive bursts in prices of gold.

But that does not happen until there is a rate of fiat inflation that reaches baby hyperinflation (12 to 17 percent)... and if productivity continues to grow... the gold price is masked heavily ... like waiting for its moment of truth.

Now as to deflation...... I have written before that gold does well even in deflationary times, mainly by a similar mechanism.... In a severe deflation, fiat is pushed out like mad.....but prices drop for a while anyway.... since we are not in baby hyper inflation then, gold's price does not rise in fiat, but falls some even.....but gold does not fall AS MUCH as the fiat, so in effect, once again, gold increases in purchasing power vis-à-vis widgets.....

The deflationary analog of gold capturing its masked purchasing power is recovered when gold is used to buy deflated assets at 10 cents on the dollar..... that is analogous to a 1000 percent return on gold's buying power. This is NOT an investment return however.

So in either case, in deflation or hyper inflation gold recaptures its masked purchasing power, but it has to occur after the deflation or hyper inflation ensues.... to recover all that value vsvs goods.....

This lag is why gold seems to languish even when fiat is inflating world wide at about 8 percent a year.....worldwide. That will only last until demand falls precipitously world wide, and we are very very near that time. However, the masking effect remains presently.

Now, basically you can look at gold in the following manner.... if you have the foresight, and buy it when gold is languishing, (it is still languishing right now even at higher prices) then when either a hyperinflationary depression, or a deflationary depression ensues, you will recover all the latent purchasing power of that gold. However, seeking investment type gains in gold and gold instruments is wrong headed. It is wrong headed because of the elastic and latent price increases in gold due to various mechanisms such as productivity that mask gold's price in fiat, as long as there is not a hyper inflation or deflationary depression.......hence yearly gains are masked and so on..... Now there is clearly manipulation of the price of gold, but that is just more use of the masking effect that is a real phenomena....not a contrived one. The masking effect of gold, productivity, and fiat is a real monetary phenomena, the manipulation is evil, but it just takes advantage of this phenomena.

Gold purchases should really done for reasons that are inimical to the prevalent views today of either investment or speculation... its a strange bird in a way.

I try never to talk about gold using terms such as 'investment', or return. Those concepts are inimical to what gold really is, speculative and investment markets aside and stock and investment vehicle salesmanship aside. Now, a gold hunting company or mining company is a little different, since either role is truly capitalistic.... that is if they are trying to do what they say they are, namely finding and mining gold... but 90 percent aren't.

But then again 90 percent of the gold vehicles today really exist only to suck in investors, but do not really result in any real finds....hence they are very very speculative.

So, while I strongly think that gold should be sought after and held, many gold investment vehicles are not worth that much....frankly... I think that the real gold stock analyst community that is HONEST should be focusing of finding the entities that are truly trying to find gold, and not ones that exist merely to make a market in a stock... and that would mean that 90 percent of the stocks out there are to be sifted out.... and that should be their job. Their job is really NOT to find some company that is going to find the mother load..... but to sift out the shenanigans.

They should be seeking to validate that a company is really doing something to find and mine gold.... and following through.... and not looking for company X that has found the newest mega gold mine...... Merely a decent gold mine is quite acceptable.

This is why I wrote an article titled "what are you after?" which talked about what gold purchases are really about to me, (notice I have not used the word investment'?) .

To recap the thesis: Gold's price in fiat is masked by increases in productivity and ongoing demand for goods and services. But when a deflationary environment comes gold is able to recoup all the masked value, as demand falls off drastically, and prices of goods drop off a cliff. The same would go for an inflationary depression, gold recoups its elastic value in times of hyper inflation in big spurts....but doesn't not reflect that recoup in a linear fashion during the inflationary times if there are significant increases in productivity, until the hyperinflation kicks in.