Mike Shedlock's Confused Analysis of Gold
The most obvious indicator of the rampant inflation we're facing is the surge in the price of gold. Gold is not a cyclical commodity, so it isn't affected by concerns over the effects of the U.S. recession, like oil and industrial metals are. Nor can it be manipulated like the government price indexes, so its rise provides good evidence of inflation-and an increasing willingness to hedge against inflation.
The sharp increase in the price of gold thus provide conclusive evidence against the belief of Mike Shedlock and many others that we're experiencing deflation.
However. Mike Shedlock have absurdly tried to re-interprete this into a support of his deflation prediction. Here for example he tries to claim that higher gold prices is consistent with deflation in paper money by claiming that it signals "a destruction in fiat credit and a rise in the value of real money". The part about destruction of fiat credit is completely out of touch with reality as bank credit is in fact soaring and his talk about a rising value of real money is only true if you define gold as real money. But in that case his assertion is a mere tautology which says that higher value of gold is associated with higher value of gold. This tautology is of course completely irrelevant for the issue of how rising value of paper money affects the price of gold.
And there are two good reasons for believing that a hypothetical price deflation in paper dollars would lower the value of gold. First, it is the direct effect from higher value of paper dollars, which will lower the price of gold in paper dollars. Secondly,and arguably even more importantly, if there is no inflation in paper dollars it makes no sense at all to own gold, except for maybe jewelry purposes. Gold pays no interest or any other form of nominal return, so if there is no inflation, any bonds or stocks with positive nominal return is a better investment object. And so, if price deflation in paper dollars would be reality, the investment demand for gold would collapse, causing prices to collapse too, just like the great disinflation of the early 1980s caused the price of gold to collapse.
Thus ironically, the only way for Shedlock's gold forecast will be correct is if his macroeconomic analysis of inflation/deflation is incorrect. Similarly, if his macroeconomic analysis of inflation/deflation would be proven correct, his gold forecast would become dead wrong.
So, because his analysis is so absurd, the only thing we can be absolutely sure of is that he will be wrong about some important forecast.