Gold bugs continue to stream out of their panic rooms, acting smug after gold’s strong performance over the last few years.
Yet they better get back in their holes should deflation deliver a strong dollar rally.
Gold’s strength has been based on weak dollar and inflation fears built up over many years. One could argue that dollar bearishness hit extreme levels somewhere in 2008 when even the common man bemoaned the dollar’s long term future devaluation.
Yet this weak-dollar premise could quickly reverse in a deflationary US slowdown. In such a scenario, the dollar would strengthen and price levels would fall, squashing gold bugs in the process as gold plummets to $400. Gold bugs would fall victim to the very forces of liquidity they originally meant to protect themselves against.
Remember, you can guess the direction of the economy correctly, but be very wrong on the dollar and gold. Amusingly, cash would be king.
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