There have been a steady stream of financial pundits claiming that deflation is the greater risk to our economy. These folks are essentially carrying water for the federal reserve in their never ending quest to inflate away the value of the US dollar. Why would the fed want to do that? Because they serve the over-indebted banking industry and the over-indebted US government, and inflation would repair those balance sheets at the expense of US dollar savers. It's happening already as the fed pays savers zero percent while inflation steadily accelerates around the globe and banks can invest that free money in much higher yielding treasury notes or stocks. Instant cash flow. So Ben Bernanke constantly warns about deflationary pressures as he plies his friends with free dollars to use as they see fit.
But, what about gold? It has no industrial value, no intrinsic value other than the fact that it has served as a hard currency for millenia. How do we reconcile the fact that the US dollar has lost 97% of it's value vs gold since the two were de-linked and that seems to be accelerating? How do we explain gold pushing toward new all time highs if deflation is just around the corner? Some say gold is a crisis trade, that it reflects panic and as the economy gradually improves, gold will return to simply jewelry metal. But, if the US dollar were expected to hold its value during a crisis, or gain, there would be no reason to own gold. The fact is, gold is only a crisis investment to the extent that our central bank responds to crisis by accelerating the destruction of our currency even beyond their normal pace. Global gold investors understand that the price of gold is not a reflection of the value of a chunk of heavy yellow metal, but rather the value of a slip of green paper whose production has become completely untethered from our real economic growth.
Lately it's become apparent that the dollar price of gold is unrelated to the dollar movements in FX markets. Gold is a hard currency, it doesn't care about dollar-yen or dollar-euro. If renminbi were openly traded, that would probably be the best correlation with gold and in the future we'll see that become apparent as the dollar loses its function as a global trading currency and the renminbi becomes freely exchangeable. When China gets ready to put the economic hammer down on the USA, just as we did on the USSR, they will make the renminbi available for international exchange. It's very unfortunate that our demand for pain free capitalism has led us to this point.
Ben Bernanke can't control the price of gold, neither can Obama or Geithner. They may try, via manipulation of futures prices etc, but eventually the demand for physical gold will destroy that charade. It's already happening as savvy observers note that we have set our currency on a path to zero. Eventually, gold will be unbuyable in US dollars and it's probably not that far away.