Babylon...
The case for gold is certainly not as clear in a deflationary situation as it is in an inflationary one. Actually, the stagflation scenario of federal reserves is probably the most outright bullish for gold, as it has the "worst of all worlds" flavor to it.
The way I see it, the reasons for owning gold has some elements that hold up regardless of whether inflation or deflation accompanies the recession that looms ahead of us - the "safe haven" arguments. We are in a period of "wars and rumors of wars" and I do not see that changing in the foreseeable future. That will probably get worse, not better since revolutionaries and radicals flourish much more in bad economic times than in periods of prosperity. Then we have terrorism, which has become a way of life for radicals everywhere and will likely become more prevalent as time passes, especially as we go into Iraq. Finally, if I am correct on the global economic outlook, there are likely to be a number of systemic financial dislocations, almost certainly in South America (with a number of candidates), quite possible in Japan, and with even Europe and the US not immune.
As for deflation specific reasons to own gold, assuming the danger of deflation continues, the Fed will act on Greenspan's promise (echoed by Bernanke) to run the printing presses wide open in an attempt to fight deflation. That, plus a soaring deficit and current accounts deficit will cause the $USD to be an undesirable "storehouse of value" and it will surely decline sharply as our markets continue to decline. It is bad enough that foreigners will lose money in their investments, but to add $USD losses on top of that would tip the scales in favor of repatriation reallocation of capital elsewhere - the question is where.
If my macro view of the world's economic outlook is correct, the Euro (very strong at the moment) will not be that attractive for much longer because they are arguably in worse shape than we are, and highly dependent on a good US economy for their own economic health. Japan is worse off than we are, almost totally dependent on the US economy for any recovery, facing a surging Chinese export competitor, and with very serious financial dislocation a real possibility. Real estate in many parts of the world has been in a bubble just as it has here and is very richly valued at the moment, so that would seem to be a poor choice also. In recessions, every nation wants its own currency to become devalued relative to all the other currencies in order to aid its economy through exporting, but for all of them to decline, they have to decline against something or there is no real decline. I think that something will be gold.
No other currency or hard asset that I can think of is sound enough or liquid enough to make a good place to invest - except gold (or perhaps other precious metals). In hard and troublesome times, gold has always served as a storehouse of value of last resort - one that everybody recognizes and is universally accepted as real (rather than fiat) money.
That is why I still think Gold is a good investment even if we get deflation. Perhaps it will be the only good investment for a while, as every thing else gets revalued to the downside.
Just my opinion, though.
mlsoft
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