Gold Increased In Value In Both Extreme Inflationary and Deflationary Scenarios (1900-2011) - Credit Suisse & LBS Research

http://www.goldcore.com/goldcore_blog/gold-increased-value-both-extreme-inflationary-and-deflationary-scenarios-1900-2011-cr

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks.

Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.

The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.

The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26).

Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios.

What's lost is the significance of the quote from PIMCO's CEO.  PIMCO is the largest bond fund in the world--that's what they do, invest in bonds.  The fact that El-Erian is now recommending gold as part of a "balanced portfolio" is significant, as bond investors normally shun commodities, and especially gold.  Normally, asset managers "talk their book", promoting whatever they normally sell.  Instead, El-Erian is telling the ugly truth.

Why has PIMCO flipped?  Because bonds get hammered during inflationary periods; it is one of the worst financial assets to hold during inflation.  Despite benign inflation data from the Bureau of Labor Statistics (BLS), which is severely understated via the ubiquitous (and fictitious) Consumer Price Index (CPI) , PIMCO sees an environment of rising inflation and interest rates, both death knells for fixed-income instruments (i.e. bonds).

I've said this before, and I'll say it again:  gold and silver perform well as monetary assets during periods of extreme inflation and deflation.  Some recognize gold as an inflation hedge.  While true, data actually reveals it performs even better in a deflationary environment.  Go figure.

Most people think gold bugs are taking big risks.  From my perspective, it is those who place 100% faith in a paper currency, issued by a bankrupt government, who are taking on risk.  Gold is actually the best hedge in existence in the event of extreme monetary conditions.  It has been for 6,000 years.