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Note that that excerpt makes no reference to gold's other role as a deflation hedge and/or currency of last resort. The authors assume that the current monetary system is sufficient to ensure long term confidence, plus price stability. Unfortunately, as recent events have shown, the currently configured global monetary system was an accident waiting to happen.
The only economic backdrop that I can consider bad for gold is disinflation. Gold as an inflation hedge is easily understood. The confusion arises during periods of sustained disinflation. During this period, gold loses ground, as inflation, though still positive, is declining. However, once disinflation continues into outright deflation, i.e., increasingly NEGATIVE inflation, we're not in Kansas anymore. Most people see this transition as one and the same thing. It isn't.
Disinflation is the best of all possible worlds for lenders: rent x dollars and get x dollars + interest + fees + stable purchasing power of dollars in return.
Deflation is a disaster for lenders: rent x dollars and get defaults + devaluations + near-zero interest + competitively lower fees + central bank reflation threats in return.
IMHO, we're at or very, very near the inflection point, right here, right now. Either deflation is left to run, in which case banks fail, industry shrinks, and deficits balloon, leading to first an extended loss of confidence in paper followed by the inevitable stimulative inflation; or central banks skip over the deflation bit and go to printing and pumping straight away, which, though more obviously and immediately inflationary, bypasses the wholesale loss of confidence in the paper-based monetary system!
Which do you think will happen?
GO GOLD!! |
