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Tuesday, October 23, 2012

Deflation,Inflaition and gold

The Chart above is the most elegant picture of Deflation.  If money isn't turning over - if there is no Velocity of Money, there is very little business activity.


There's just no way around this.  It is a global picture.

All assets drop under this type of withering deflation.  Especially financial assets, of which gold happens to be a subset.

So - is gold doomed?

Not necessarily.  The last terrible deflation of the 30's, gold dropped at first, and then later not only outperformed all other financial assets but actually more than doubled in dollar terms.

This will happen again as the dollar breaks down.

What makes me think the dollar will break down? The Chart below is an elegant picture of the inflation of all necessities priced in dollars:  The lower the dollar, the higher the price of necessities.

Is gold a necessity?  Globally the answer is yes.  In the US, it has yet to become so.  As the economy breaks down, that will change.


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