I am often asked how gold will fare in an all-out deflation? My gut tells me that deflation is an really not much of an option for the US, unless the Fed wishes to experience the deflationary 1930’s on steroids. Further, Fed Chairman, Helicopter Ben Bernanke has openly said what he would do to avoid said deflation, including dropping $100 bills from a helicopter.
But for arguments sake, here is my 2 cents. In deflation, items backed by debt head lower. In deflation, debt becomes more and more difficult to carry. The only item of real intrinsic wealth that is free of debt is gold. So, in a time of deflation I would expect to see a push towards the safest item of debt free, undisputed time tested wealth-gold.
But for me, the question should be what will the Fed do to control inflation, in their attempt to stave off deflation? And, will they ever again be able to raise interest rates high enough to fight inflation? Given the enormous debt burden, the fragile housing market, and our need for foreign investment to finance the governments ever expanding list of entitlements, I am not so sure they can, at least anytime soon. To me that’s the real question!
In any case you know how I feel, inflation or deflation, protect yourself by getting longer gold!