WC Varones

Don't lend your hand to raise no flag atop no ship of fools

ZeroHedge on Deflation and Gold

This aligns with my views:
In deflation, gold should be the tallest pygmy. Even if it drops 40% in a deflationary depression, it will still stand tall among the financial wreckage that is defaulted debt and worthless equity. But, if the Fed succeeds in combating this event (preemptively or after the fact), hyperinflation becomes a high risk and we know what that portends for fiat currency.

During the U.S. Great Depression, there was a high demand for dollars as the last refuge for safety. "Why were dollars so valuable during the Great Depression?" is what you have to ask yourself before you go plowing any more of your money into long-dated bonds or the DX. Our own analysis sees a lack of counterparty risk and scarcity as the two reasons Dollars were coveted back then. Hardly an original idea, but relevant when you compare today’s greenback with depression era dollars.

No Counterparty Risk- Dollars were backed by gold then, now they are backed by GDP. Some would even say that fiat money is debt... so there goes the counterpartyrisk argument. Meanwhile, physical gold has no counterparty risk.

Scarcity- There are plenty of dollars out there in the mattresses of foreign governments and scared people. Fractional reserve banking is not the issue it was during the 1930s, especially in an age of e-money. The Fed is also printing in advance of a deflationary debacle, it is not playing catch-up this time. So, scarcity is not a reason to buy dollars now. Inflation remains in check thus far due to a lack of monetary velocity, not a lack of money supply. Gold is scarcer than dollars with an annual growth rate of only 1.7% . This time fractional reserve bullion banking might be a catalyst for more scarcity motivated gold buying.
Gold closed up again today, at $1225, even as long Treasury bonds hit depressionary low yields for the year.

3 comments:

Anonymous said...

Long gold is consensus.

W.C. Varones said...

Long Treasuries, long equities, long commodities are also consensus.

That's what happens in an easy-money driven all-asset bubble.

They're not all gonna be right, but they are probably not all wrong either.

Anonymous said...

83 percent of all U.S. stocks are in the hands of 1 percent of the people. It's very hard to be a stockholder after the last couple of years.

Ownership of gold has got to be near an all-time high. It's very easy to be a gold-owner. Still, your hope for gold is that more people will want to own it in the future... which certainly is possible.

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