Morgan Stanley: Beat Deflation (or Inflation) with Gold



Experts are divided on which threat is worse for the global economy, deflation 
or inflation, but gold is a safe bet in either outcome, Morgan Stanley said in 
a research note.

“Gold looks to be the investment area that provides significant upside under 
the inflation-rebound scenario and relative resilience in the deflation 
scenario,” Morgan Stanley said.

It could act as a “relative safe haven” in the event of spiraling deflation, 
the report said.

But if the wave of government bailout money eventually sends prices higher, 
“gold should be one of the best hedges for investors,” it said.

Gold has performed relatively well throughout the last nine years, even through 
the 2001 deflation scare, the report pointed out.

Market watchers remain at odds as to whether the ongoing financial turmoil will 
develop into an inflationary or deflationary environment.


Morgan Stanley thinks that government intervention will eventually manage to 
avert a multi-year debt-deflation spiral.

"Once policy action gains traction, growth and inflation will quickly return, 
with the risk of hyperinflation," the report said.


Morgan Stanley's investment strategy remains "patient, prudent," despite their 
belief in the effectiveness of government intervention.

"We are still in capital preservation mode, but prefer cash as we believe bonds 
are already pricing in too much deflation," it said.


Looming inflation may keep gold prices high, says WGC

Gold prices may continue to rise this year due to persistent threats over 
financial recovery of the developed economies and concerns over inflation. 
Investment in gold is considered as a safe hedge against inflation.

“Investors are worried about the price stability. The money supplied to the 
market in 2008 is posing threat of inflationary pressures. Investors, who do 
not believe that higher inflation will materialise, worry about the dollar 
outlook,” found the latest report from the World Gold Council (WGC).

Gold price rose for the ninth consecutive year in 2009 to end at $1087.50 (Rs 
50,000) an ounce (28.3 gm), as against $869.50 an ounce at the end of 2008. The 
average gold price rose 11.5 per cent to $972.35 an ounce in 2009 from $871.96 
an ounce during the previous year.

Recovery in the global economy, especially in countries like India and China, 
is also likely to boost jewellery demand. However, jewellery was not a primary 
source of support for gold prices in 2009. Investment flows, dollar-hedging, 
inflation protection, and buying by central banks propelled the yellow metal to 
successive new highs, the report added.

The global economy began to show tentative signs of recovery since the second 
half of the year 2009. The pace remained uncertain. While some developing 
economies, like China, seem to recover at a healthy pace, their developed 
counterparts, in particular the US and Europe, are still far from returning to 
a “normal” rate of growth.



"Gold is money; therefore a hedge against inflation and deflation"

Warren Buffet one of the world's most successful investors apparently once said 
the following about gold:
"It gets dug out in Africa or some place. Then we melt it down, dig another 
hole, bury it again and pay people to stand around guarding it.
It has no utility. Anyone watching from Mars would be scratching their head."

Well, Mr Buffet let me attempt to explain to you and the "Martians" why this is 
so, as well as correct your statement (If it was your statement) that it has no 
utility.

First of all, gold is money; it is not like other commodities that we use 
mostly in production, consumption etc. One of money's main functions is to 
store wealth. We therefore earn money, we hoard it, we guard it and then we 
exchange it for assets when needed.

Gold is the premier store of wealth that this world has known for the last 3000 
plus years. Even the fact that gold is not the official currency in the 
countries of the world has not changed this fact. I know of no place in the 
world, now or many years before, where gold is not known and not highly valued.

So in summary, gold is money and it derives its usefulness from being money and 
therefore people dig it out, melt it down and guard it like they would guard 
money.





Inflation, Deflation or Just Gold ?

The whole inflation versus deflation debate is actually much less important to 
me now that I understand the role of Gold. Gold protects against financial and 
fiat currency instability and a loss of confidence in "the powers that be." It 
is Gold's time to shine as an asset class during this Kondratieff Winter, 
whether the Dollar does a Prechter deflationary death dance higher first or a 
straight Sinclair inflationary flop down to the 52 U.S. Dollar Index level 
(from the 75 close on Friday). People who only see "Dollar Up, Gold Down" and 
vice versa are missing the bigger picture. All global fiat currencies are 
sinking together, just at different rates. It is simply Gold's turn as an asset 
class. Cycles. Greed. Fear. Gold will be a lousy investment again in 5-10 
years, but it's WAY TOO EARLY in the cycle to be worried about "the" top in 
Gold. Wake me when we get to $1500/oz. and I'll be happy to revisit the issue 
(with another bullish commentary about how
 the next stop is $2,000). 

So, whether its deflation or inflation or both, Gold is going higher. This a 
confidence issue and a secular cyclical phenomenon. "Gold good, stocks bad" is 
a trend set to continue.

Having said this, I still enjoy the inflation versus deflation debate. From a 
practical standpoint, as Martin Armstrong has said (see below), big money that 
moves currency markets can flow almost anywhere in the world to find a safe 
haven. In the early 1930s, capital flowed into the United States once the major 
economies like Britain and Switzerland abandoned the Gold standard, causing a 
crisis in confidence in these previously "good as Gold" currencies. This global 
flow of capital into the U.S. Dollar caused our Dollar to rise in relative 
value, aggravating the natural state of deflation we were experiencing at the 
time. 

Naturally, Europeans sought the safety of a foreign currency backed by Gold 
once their own currencies were aggressively devalued by discontinuing their 
respective Gold pegs. In fact, if the United States stuck to its guns, it 
probably would have lost all its Gold to the hoards of paper note-bearing 
European souls looking for real money. American citizens followed suit and 
traded their notes for Gold (benefit of a true Gold standard: no commissions or 
premiums!) - these evil Gold hoarders of course had to be stopped and/or 
punished. Gold was thus confiscated from American citizens (with safety deposit 
boxes at times watched by officials to prevent clandestine Gold ownership) and 
the American Gold standard was finally weakened to help break the cycle of Gold 
loss and deflation. An overnight 69% currency devaluation ($20.67/oz. to 
$35/oz.) and the criminalization of private Gold ownership in the United States 
(ending a "true" Gold standard period in this
 country) was all it took. As destructive as they were to confidence and 
people's savings, these Roosevelt mandates helped fuel a weak reflationary 
cyclical general stock bull market (1933-1937 was not a weak cyclical bull 
market for Gold miners, by the way). 

Will we repeat a 1930s deflationary "collapse" scenario? Will we have a major 
currency event? Though deflationary forces are strong due to real estate and 
banking/credit/debt fiascos, confidence in the Dollar is low. The world's 
greatest debtor nation has not inspired much confidence in global market 
participants seeking a safe haven. And I am not talking about bear market 
currency rallies here, I am talking about the dominant long-term trend. 

Will Bernanke and his U.S. Treasury lackeys finally destroy the last shred of 
confidence in Uncle Buck with their idiocracy? Will capital flow into or out of 
the United States when the next wave of the global crisis occurs? Again, not 
talking about dead cat bounces here, talking about the dominant long-term 
trend. Global capital flows have more control over the fate of the Dollar (and 
every international currency) than Ber-spank-me, but Benny's actions can 
certainly cause some of our creditors to figure out sooner that it may be 
better to walk away and simply write off their bad debts. Whether you've chosen 
sides on the inflation/deflation debate or not, this debate does allow you to 
recognize the nasty war of fundamental forces that is sure to cause further 
economic chaos in any scenario.

Me, I see further capital flight away from many financial casinos/markets 
around the world coming. I see a further loss of confidence in bankstas, Wall 
Street hustlers and paper magic notes designed to explode. I think some of this 
global money will be seeking a safe haven in Gold. I am not talking massive 
amounts of money, as Gold is a small market. I am talking about a few more 
"elephant" investors (i.e. governments, large private institutional funds) 
around the world deciding to up their physical Gold insurance from 1% to 5% of 
their portfolio. That's all it would take to start/continue a big move higher 
in the Gold price from current levels.

Gold is safe, it is reliable, it requires no government assurances or bail-outs 
to stay in business, it does well when there is little confidence in the system 
and it is not debt-based. These are all things you want during a contractionary 
secular bear market in general stocks and real estate. Sure, governments can 
try to further tax or even confiscate Gold (again), but the government 
historically gets too tyrannical in trying to tax or confiscate all kinds of 
personal property at this stage of the economic cycle (including stocks and 
real estate). This is hardly a unique problem for those who take the plunge 
with Gold, despite paperbug concerns. At least Gold can be held quietly 
"off-ledger" until more rational minds prevail (this is not as easy with stocks 
and real estate).

In fact, if the government does "ban" Gold or tax it more excessively than it 
already does, nothing could be more patriotic than to completely ignore such a 
decree as a moral act of civil disobedience. By the way, if anyone in 
officialdom is reading, I sold all my Gold last year and this is just an 
academic intellectual exercise designed to make sure Americans follow 
everything their mama guvmint sez by pointing out the insanity of messing with 
Big Brother, who is all-knowing, all-powerful, and should never be disobeyed. I 
am a paperbug after all, I swear.

I believe the global paper fiat system is breaking down. I believe people will 
increasingly trade their paper for Gold regardless of whether we undergo 
deflation or inflation. After a 20 year bear market from 1980-2000, Gold ain't 
done after a 4 fold gain. Has everyone forgotten how paper fiat market bubbles 
and Gold manias work? 

I suppose that the economic events of the 1930s or 1970s, both inducing Gold 
and Gold stock manias, could not possibly happen again. Ever. 40 year intervals 
(if this is, perhaps, say a normal repetitive cycle) would put us at the 2010s 
for a new Gold mania, but Gold is dead as an asset class forever. Gold will 
never again have a serious bull market. Oil can go up 14 fold in 10 years but 
Gold couldn't possibly go up even 10 fold in the same rough period (which would 
put us at $2500/ounce). The last bull market in Gold on a fiat paper system 
took Gold prices up 24 fold in 9 years ($35 to $850). The S&P 500 went up 16 
fold from 1980 to 2000. This time, a 4 fold gain over a decade in a hated asset 
still considered worthless by the mainstream crowd is a bubble mania waiting to 
pop any second and take the Gold price back to Prechterite levels?! No sale, 
sorry...

I believe $2,000/oz is a minimum conservative upside target for Gold and it 
wouldn't shock me to get to $10,000/oz. Until the Dow to Gold ratio gets below 
2, I wouldn't even consider that the Gold bull market might be over. We've got 
a long ways to go. Ignore the short-term noise and the paperbugs. Forget the 
$25-50 swings. Sit tight and be right.


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Source: http://www.bigcapital.wordpress.com





      

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