Gold should go down in a deflation environment initially. But if deflation gets bad enough, the government will make the price of gold go up because they get desperate to create inflation.
If you’ve tried everything, if you want inflation, and you’ve tried everything to create it, so you tried money printing, cutting rates, currency wars, Operation Twist, QE, forward guidance, nominal GDP targeting, you’ve tried everything, you still didn’t get the inflation. There’s one thing that always works, which is devaluing your currency against gold.
So there could come a time when deflation gets so bad that the Fed and the treasury actually raise the price of gold, not to enrich gold investors, but to get close to generalized inflation. Because if gold goes up, silver and oil will go up along with it. It’s exactly what happened in 1933.
So that’s one path. But the other, perhaps more likely path, is that the Fed just keeps printing money and finally succeeds in changing behavior, velocity of the turnover money picks up and inflation goes up on its own. Then gold will race way ahead of that. That’ll just change the psychology.
