Even It Up

A good man pays his debt
But you ain't paid yours yet
--Heart

For years my buddy Don and I have been getting together for a weekly dine-and-discuss. A marquee topic since 2002ish: what plausible scenarios (e.g., hyperinflation, deflation, 'normal' inflation, etc) would result from the excesses that have been building in our economic and financial systems over many years? What would the scenarios look like in motion, and how should one be positioned to manage the risk/reward of each?

When noodling over the specter of deflation, we wondered how well gold would hold up in an environment of contracting credit and generally declining asset prices. Would gold plummet like other assets classes, or would it hold its value?

There's little question now that deflation is indeed what we've been experiencing over the past year or so. Debt and credit are contracting, and risky assets around the world have been declining in price in a correlated fashion.

Thus far, however, gold has been holding up well. In fact, since the beginning of the year, when other asset classes such as stocks, real estate, oil, etc are typically down 30-40%, gold is nearly even on the year.

Demand may be coming from buyers who view gold as a safe haven during uncertain times. Or perhaps investors are discounting a relatively brief deflationary period to be followed by massive monetary debasement (read: hyperinflation) as reflected by the $ trillions of stimulus being thrown around by bureaucrats. When the supply of fiat currency goes up, so generally does the price of gold.

Whatever the reason, gold has thus far passed the deflationary test in fine style.

position in gold