Does inflation really drive the price of gold? A lot of people think it does, however, Michael Shedlock (Mish) does a pretty good analysis of it on his blog and he doesn’t come to the same conclusion.
Gold in many timeframes is not much of an inflation hedge.
In terms of real price, gold is a better deflation hedge than an inflation hedge. The reasons…
Gold is money. Proof of that statement can be found in the market behavior of gold. The markets treat gold as if it was money (not only now but on a historical basis). On that basis gold must be considered money regardless what the central banks say.
Money is worth more in terms of other goods and services during periods of deflation. During periods of disinflation “cash is trash” and that helps explain why gold dropped from over 800 to 250 even though we had a positive (although falling) rate of inflation for much of that timeframe.
Gold is stateless and has no liabilities attached to it. It is the only money that won’t be touched by whatever measures the authorities decide to take to combat deflation.
In addition to being a deflation hedge, gold may also play a role in a panic flight to safety scenario. For example: If the US dollar were to suddenly collapse and/or if fiat currencies were totally repudiated in general, gold would be a huge beneficiary.
Given the current underlying conditions, with increasing chances of a deflationary credit implosion related to housing, along with some chances of a collapse in the dollar, Yen, or fiat currencies in general, the incentive to store wealth in the form of gold is massive.
