Gold Performance During Inflation and Deflation

Many observers acknowledge that gold is a good hedge against inflation, as currencies are debased by central bankers. What they don't understand is that gold performs even better with deflation, which accompanies monetary disorder. They don't realize that gold is a safe haven asset when confidence in other asset classes dissipate, as they eventually do with government over-indebtedness and reckless currency and credit creation.

In other words, in a time of crisis, gold isn't just a commodity. It's a sound currency which will maintain its value, unlike fiat currency backed by nothing tangible.

Look at the chart of equities (S&P 500) vs. gold. Since 2001, the global economy has experienced two deflationary (or at least disinflationary) wipe outs. Inflation has been dormant--at least according to official CPI statistics (which is another boondoggle). Gold should have underperformed in that type of environment, according to conventional wisdom. Yet, during this time period of deflation, stocks have doubled, while gold has surged 3 1/2 fold. So the answer to the question: "when should one hold gold: to hedge against inflation or deflation?", is simple. It's both.