[biohacker42]

Very interesting interview but I was confused about his predictions for gold and inflation.

He makes the point that deflation is a serious concern so the Fed will devalue and gold will be a great investment. But then he says that the devaluation will barely produce a single digit rate of inflation and stocks will be a great buy.

So which is it, low inflation and cheap stocks, or gold?

Gold doesn't pay dividends so the only way you make a profit is by it going up, or you simply preserve your wealth when there's inflation.

But why would you hide in gold with low single digit inflation?

[nostrademons]

The inflation rate isn't the only (or even a particularly good) predictor of gold's value. From 1971-1979, gold shot up from $35-$900/ounce, a 30x increase, yet cumulative inflation was only 6-8x. Then over the next 5-10 years its price fell from $900 to ~$300, a 3x decline even though cumulative inflation ran about 150%.

Gold is like any other commodity: its price behaves according to supply and demand. When there's massive economic uncertainty, people demand it, so its price shoots up. A bubble, in other words. Economic uncertainty includes deflation, panic, and social unrest as well as inflation.

[biohacker42]

So perhaps what he meant is that gold is a good speculative opportunity, not so much a way to escape high inflation.

I prefer not to speculate so if deflation or low inflation are on the horizon I'd rather invest in something that's cheap and pays dividends, and incidentally, is taxed at a lower rate then commodities.

[blakeb]

There are a lot of pieces, but I think this might be what he's getting at.

Between now and sometime possibly about a year from now, stocks are likely to go down much further than they already have. So stocks are a bad move right now. Reasons behind this are lack of credit due to all the deleveraging and lack of demand due to consumers scaling back their spending due to also being overextended and seeing their home and portfolio prices dropping as far as they already have. Home prices will continue to drop as well, for a multitude of reasons, one being that tons of people can't afford their payments--hence, we have too many homes worth too much.

The reason gold will hold up or go up, in his view, despite lack of extreme inflation, from what I can tell, is this: asset prices (stocks and homevalues) everywhere are falling. But the money's still floating around. This would normally lead to big deflation. But since governments are all going to be pumping cash into their economies by printing money, they'll offset the deflation and we'll end up about even. In a sense it's inflation--money will be valued less; but so will most assets such as homes and stocks. One big asset that won't be valued less is gold. As more people start seeing it this way, gold will go up and up.

I'd guess that around the time he's forecasting a stock trough is when he'd recommend moving a bunch of your portfolio back from gold into stocks.