Don't dump gold yet, inflation is still alive

Don't dump gold yet, inflation is still alive

For gold to plunge in price in the way it has this week, at a time when leading central banks around the world are printing unlimited quantities of paper money and when warnings are being sounded loud and clear about the dangers of rising inflation in emerging economies, one would have thought the world had gone mad.

Gold has traditionally been seen as a classic hedge against currency debasement, and the fact that the bullion price has dropped so far at a time when money is being printed with total abandon means that the idea of "bad money driving out good" (Gresham's law) is regarded now as obsolete.

It seems to be assumed that the "dragon" of inflation is dead - at least in the so-called advanced economies - when in fact it is almost certainly just dozing, waiting to roar back into life when least expected.

Already it is beginning to breath smoke, if not yet fire, in Asia. It is as though the economics of the Bitcoin world had infected global investors, and financial logic had been turned on its head. But then the way in which markets are ignoring the perils of latent inflation and potential fiscal crises hardly suggests that sanity is prevailing.

The most rational explanation for gold's US$100 an ounce price plunge on Monday is that some potentially hideous losses are expected in suddenly very volatile bond markets, or in equally volatile currency markets - and that investors are dumping gold to cover these losses.

This week's events also suggest that there could be a stampede back into gold once the realisation takes hold that there are no longer any really safe havens in currency, equity or bond markets now that central bankers are near to papering their toilet walls with paper instruments.

Perhaps at the root of the problem is the fact that financial crises have become apparently painless since the time of the dot.com bubble in 2001 and the global financial crisis of 2008-2009. What does not hurt you you do not fear, and what you do not fear you do not guard against.

Alan Greenspan, then chairman of the US Federal Reserve, exercised his famous "Greenspan put" at the time of the dot.com debacle and flooded the US system with enough money to absorb most of the dot.com shock and to get the US economy moving forward again.

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