In today’s newsletter, Simon Black writes,
Whether any potential deflationary effects are short-lived (like 2008) or long-term (Japan), I still want to own gold. Along with a debt-bubble bursting will come a severe loss of confidence in the fiat system… and gold is a great hedge in this scenario.
I am not sure I agree. I am guessing that what he refers to as the bursting “debt-bubble” is the possibility that Greece will declare bankruptcy, causing a ripple effect throughout debt-ridden Europe. This will not cause the same thing to occur in the United States; I am not sure about the various South American and African countries which economies might heavily depend on European and American industry (i.e. imported producers’ and consumers’ goods).
Whatever the case, this crisis leads to further monetary and price deflation, causing the price of gold to drop. Black suggests not selling your investment in gold prior or (early) during the deflation, because gold will still be useful to hedge against the possibility of a currency that loses its value out of lack of confidence. The problem with this suggestion is that the conclusion does not follow from the premise in Black’s theoretical rendition.
Confidence crises are caused by inflation, not deflation. Further, a fall in confidence in the safety of government debt is not the same as a fall in confidence in the dollar. Now, there may be some shot at a confidence crisis in money if the response to the debt crisis is heavy debt monetization. But, I would think that a good investor would sell his investment in gold prior to any debt crisis and then would simply re-buy when gold is nearing its trough, because there will be a lag time between crisis and policy response (a response that is not guaranteed; and even if it does occur, the likelihood of hyperinflation [especially sustained hyperinflation] is still incredibly low).
I do not disagree with owning gold. I am just saying that there is no reason to sustain the losses during sharp deflation if you can avoid it (even it cuts short any profits you might make if you sell your investment too early).