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Gold works for hyperinflation, not deflation

The big question of the day.

To buy gold or not buy gold.

The time to ask that question was 10 years ago when financial advisors and journalists were telling people that gold was a dead end and no one should waste time or money on it. That's when the price was right.

Now, it's not so clear.

On the one hand, there are people who are sure it's going to $3000 or more. Some claim probable price targets in the 10 and $20,000 range.

On the other hand, let's look at reality.

All signs indicate we are in a deflationary period. Deflation takes all prices down. So far, real estate has been the prime victim, but the cycle has barely gotten started.

Deflation means a scarcity of cash and that certainly describes the time we are in.

Consumers don't have cash, small businesses don't have cash, in cities and states don't have cash. Corporations give the illusion of having cash when you ignore the mountains of debt on their balance sheets. The only people who have cash are small handful of banks who've been given the equivalent of free money by decree of the Fed, but even those banks with all their bailouts are teetering on the brink.

Paradoxically, the dollar is firming and price and getting stronger bit by bit.

This is exactly what you'd expect from deflation and in a deflationary period The price of gold and silver and everything else will go down. It will take less dollars to buy more gold.

Were we in or on the verge of a hyper-inflationary period, then gold would make sense. Hyperinflation means that the system is flooded with money.

In spite of the multi-trillion dollar bailouts, the system is most definitely NOT flooded with money. This sheer scale of the debt dwarfs even the unprecedentedly large bail outs. imagine trying to fill Lake superior with a fire hose. The fire hose may seem to spray an impressive amount of water, but in comparison to the container is trying to fill, it's for all practical purposes nothing.

The gold merchants, and people who are obsessed with gold as THE end-all and be-all solution, make very strong emotional and seemingly rational arguments for buying gold.

If you live in a country that is obviously on the verge of currency collapse, it might make sense to buy some gold even at these prices which in my opinion are high and heading lower.

On the other hand, you might do just as well, better in fact, by buying US dollars. It will give you a lot more flexibility both in the acquisition and the spending. You can buy $100, $200, $500 worth of US dollars and have something significant. To buy one indivisible ounce at the time of this writing will cost you around $1700. Then you are "all in." Not only that, you will pay a steep commission buying the gold and steep commission selling it.

If you are really worried about impending social collapse, a much better investment in gold would be gold chains, not gold coins. Chains can be sold one link at a time unlike coins which are in all or nothing proposition.

If you're in the US, spending weak but growing in value dollars on high and declining gold makes little sense as of the time of this writing (11/25/11) especially if you have limited means.

The best investment if you're worried about societal disruption this storable food and it doesn't have to be expensive prepackaged meals. Beans and rice. They store very well. A little goes a long way. And if the proverbial s*** hits the fan, you are going to be infinitely better off with food at home than having to go to the streets to trade gold for food.

Special note: The lizards who are pushing people to buy "collectible” gold coins deserve a special place in hell. The premiums buying such coins are enormous. In a deflation, those premiums will never be recovered. As for on the street trading value, such coins will be valued for their gold content only.

If you really feel you need physical gold at today's prices, and you want more than gold chains, the only way to hold gold is in commodity coins like the Maple Leaf or in recognizable commodity size and stamp bars. And you should own the gold itself, not a paper certificate, not a warehouse receipt, not part of a pool, not an ETF. Owning gold in any other form than physical gold completely defeats the purpose of investing in it as a hedge against disaster.