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I wish to expound upon a thought that I do not have the answer to: Gold—and the environment in which it prospers. Many argue the yellow metal benefits from deflation; others argue the same for inflation. Some argue cash will be king and expect gold to tumble. Historical examples are fronted to support both claims. The wave theorists give arguments to hold cash and avoid gold in the short-term. I wish to throw out my two cents on the whole front. Deflation. With the US dollar pegged to gold for most of history the fact that gold did well in deflation is axiomatic. In deflation, cash becomes more valuable, thus so did gold. By the same token, inflation was necessarily bad for gold in the same environment. Commodities generally do poorly in deflation as the general price level is in decline. Money on the other hand, can purchase more. Thus, the argument become whether gold’s function as money overwhelms the commodity role. This ignores the whole argument of what is money and how gold is denominated. Gold has done poorly in the deflation of Japan in yen terms. As you can see the case is not clear-cut. Inflation. Gold is often considered the best store of value. Thus, gold is an inflation hedge to hold purchasing power. Historically, gold has well over the past 5000 years with relative periods of strength and weakness in this role. In 1920’s Germany, holders of gold maintained their purchasing power even as the Mark crumbled on a log scale. In 1970’s America, the same held true. However, since 1981, we have had inflation and a falling gold price. Again, the picture is not clear in the short run. Gold can’t have it both ways. If it were always good in deflation and inflation, then the price of gold would never go down. Why would anyone sell, since it always does well? This realization brings us to the simple dynamic of supply and demand. Funny how it always comes back to simple economics. The perceptions of the market change and dictate a new equilibrium. In 1982, the policies of Volcker changed the dynamic and costs involved, thus changed the perception. Gold has always adhered to the law of supply and demand and always will. Keep that in mind when swearing ones allegiance to gold or anything for that matter. The wave theorist, using charts dating back centuries argue for a bulling cash case and bearish gold case. I understand the theory, and don’t wish to argue the merits of it, but I wonder how using a chart which some would argue were one in the same until 1971(when Nixon closed the gold window), show different long-term cases. My own biases of course make me bearish the US dollar, so you could argue I am talking my own trade here. If a country decides to abuse its currency, the end result is the destruction of that fiat currency. I can find no example in history of a fiat currency sustaining abuse over a long period of time. So my question to the wave theorist is as follows----if all of your long-term charts are effectively denominated in gold, until 1971 how can you make different long-term prognostications for gold and cash when gold is cash for the period of your charts? Where does this place us? Gold can benefit from deflation and inflation and be hurt in both. I believe gold will be the place to be as long as the present macroeconomic situation persists—i.e. if Greenspan and Bush maintain their present course. Remember, markets feed on themselves in what Soros dubs reflexivity. Gold is no different. If gold takes center stage like it did in the late seventies, watch out. I can find no example of a paper currency that stood the test of time, the pressures being too strong to devalue. Gold and Silver have done so, albeit imperfectly. Thus in my opinion some exposure to metal is only prudent in any environment. You might lose some money, but will never lose 100%.
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