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.Gold closed up again today, at $1225, even as long Treasury bonds hit depressionary low yields for the year.
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.
ZeroHedge on Deflation and Gold
This aligns with my views:
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I talk a lot about inflation. But today was the first time in my life I actually used a dollar bill as toilet paper.