Ironically, the quintessential inflation hedge is teaching the anti-fiat currency crowd just how painful deflation is. People that promote the gold standard and gold as a currency do so because they claim that the inflationary practices of the Federal Reserve are destructive to the economy. They claim that the US dollar has lost over 90% of its value since the creation of the Fed, and protest at rallies chanting "End the Fed." The problem is mild, stable and predictable inflation is the ideal environment for economic growth. Deflation is the death sentence for an economy, and inelastic currencies like gold and Bitcoin are deflationary currencies.
The foundation for a deflationary spiral in gold are outlined in this article by a fellow Seeking Alpha contributor:
Lastly, cognizant of the prospect that the gold price may now fall even further, there appears to be a growing sense that the world's most cost sensitive gold buyers in Asia might just wait and see how much lower prices go before buying much more.
It is shaping up to be a long summer ahead for gold bulls.
The problem with deflation is that economic growth requires people consuming, merchants selling and producers producing. Mild inflation is a mild stimulus for people to consume sooner rather than later to maximize the purchasing power of their dollar. Inflation tends to bring spending from the future to today, which is good for current economic growth. Deflation does just the opposite. Deflation rewards the consumer to push spending off into the future. Why buy today when it will cost less in the future. Gold has collapsed from over $1,900 to under $1,200, silver has collapsed even more, and neither show any signs of reversing their trends any time soon. What this does is reward buyers to wait and see how far gold and silver will fall. This is why deflation is so bad, the economics encourage lower prices, regardless of production costs. That is why I would ignore the headlines that gold is falling below production costs, it won't matter, especially when owners are having difficulty liquidating their inventories. I also wouldn't expect the classic buyers of gold like China and India provide support. Gold and jewelry are the ultimate luxury goods, with plenty of substitutes like pearls and diamonds, so there is no reason for the buyers to rush back into the market. To the contrary, gold buyers will be able to buy more rings and necklaces for their loved ones the longer they wait.
In conclusion, once deflationary expectations are established, they are very very very hard to reverse, especially in a product that is totally discretionary. Deflation rewards buyers to sit on their hands and wait, and as they wait, the price falls further and further. Gold buyers have absolutely no reason to rush back into the market, and existing owners like the SPDR Gold Trust (GLD) have huge inventories whose liquidations may satisfy any demand that does exist. With huge inventories sitting on the sideline, production costs are likely to be irrelevant, at least until the inventories are cleared. Bottom line, I wouldn't be rushing to buy gold. The trend is your friend, and the longer you wait, the lower gold will likely go. I would expect gold to at least reach pre-QE levels, and if that happens, I would expect another leg down as the inflation mystique evaporates.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.