A Riddle's Resolution: Gold as Inflation-Proof Deflation Hedge

I’m not the only person out there trying to reconcile how gold could be both an inflation hedge and a deflation hedge. 

How a thing could be something while at the same time being the opposite of that something is a logic puzzle worthy of Raymond Smullyan or perhaps the Tootsie Pop Owl.

Apparently, there is a line of reasoning out there that may be of help to those troubled by the inflation/deflation hedging potential of gold ownership.

From WhiskeyAndGunpowder.com (I know, awesome):

Knowing how governments will respond to deflation, the case for inflation-proof gold looks increasingly clear to cautious wealth…

Useless for pretty much everything except storing wealth (its economic value is social, not industrial), gold acts as inflation-proof money when investors need it most — right in the middle of an asset-price deflation.

Given central banks’ default response to any level of financial stress, it’s a unique and appealing attribute. Because rather than leaving cash hoarders alone, sub-zero real rates of interest — plus the ever-present threat of massive devaluation — force sleepless nights on cautious savers. (The risk of banking collapse is an extra, but non-government-inspired threat.)

In simpler terms, the case for gold-as-deflation-hedge can be made based on the obviousness of what policy response will likely be toward deflation –  deliberate inflating.

Think of it this way – if you are a cartoon character and your house is infested by mice, you should buy a whip and a chair, because eventually someone will be bringing in a lion to deal with those meeces mice.

It is this chess-like premonition of cause-and-effect that allows you to look at gold as both a deflation and an inflation hedge – you’re simply predicting that the powers that be will swing their pendulum too far in each direction.

If you’ve hit upon this answer before I have, one gold star for you.  I’m not always the quickest, but eventually I get there.

Riddle solved, next!


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