The Oldest-Established Store Of Value Moves To Center Stage

http://www.zerohedge.com/article/don-coxe-dissects-gold-oldest-established-store-value-moves-center-stage

That gold and the dollar are fundamentally inversely correlated to each other is obvious. One bets on gold because one is deeply skeptical that governments will fulfill their promises.

So why are they both in a mini-bull market?

So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?

And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?

We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.

As we have written in these pages, gold is the classic store of value. It should retain its value under both inflationary and deflationary conditions.

That means a great time to buy gold to make capital gains is when inflation is rising.

It also means a great time to buy gold to conserve existing wealth is when (1) prospective risk-adjusted returns on bonds and stocks look unattractive because the economic outlook is for slow growth with (2) a risk of a renewed downturn that would hammer the value of stocks—particularly financial stocks—and real estate anew, and (3) bond yields are too low given the endogenous risks in the currencies in which they are issued and (4) the range of future fiscal deficit forecasts is from grim to ghastly.

What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.

That is why gold and the dollar can—if only for a brief time—rise together, as investors see that the only major currency alternatives to the dollar—the yen and the euro—are backed by rising national debts, rising numbers of pensioners, falling working-age populations, falling real estate prices, and a falling OECD share of global GDP.

So…as a store of value for future generations,

If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?

It’s so old, it’s new again.

It can’t be synthesized.

It’s been despised by every liberal economist since Keynes.