I was under the impression, though, that gold has always been considered a hedge against both deflation and inflation.

I don't know if that's really been put to the test. When have we ever had deflation since we went off the gold standard? Inflation has been the modus operandi of all central banks since then. Even today, with all the deflation talk, the central banks are still issuing new currency. What's behind the apparent drop in asset prices is a forced liquidation by insolvent entities that gives the appearance of deflation but that doesn't fit the description (contraction of money supply) in the Austrian sense.

We hear that banks are unwilling to lend, and that the new money created is simply going to shore up reserves. Even if banks were willing (able?) to lend, would anyone step up to borrow at this point? My contention is, no. We have reached the end of a massive credit expansion and there's nowhere left to go but down. All asset classes have to be marked to their intrinsic value, which given the excesses of the last few years, combined with the fact that markets tend to overshoot, means we have much further to fall. I'd put it around 400 on the SPX, but that could be a few years away. First we have to get through this bear market rally.

So, what does it mean for gold? Well, gold continues to climb in fits and starts, a function of safe haven buying offset by forced liquidation of failed longs who, in a credit crunch, sell what they can - gold being the most liquid of assets. This could go on for some time, or it could end suddenly with the collapse of a major holder and the forced sale of assets including gold, which would take us down, once again, and flush out the recent panic buyers, setting the stage for a longer term rise off the ten year trend line I mentioned before. Or we could see genuine panic ensue, which would take us to Jim Sinclair's target in a matter of weeks, if not days.

The truth is, no one really knows. It's all theoretical since we have no prior example from which to draw comparisons. The so-far lackluster performance of gold in the face of a massive financial crisis could be telling us that the theory is simply wrong. That gold is a hegde against nothing and is simply responding to market forces like any other commodity. OTOH, if you believe the Gold Cartel theory of price suppression, then you have to have a trigger that cause the cartel to lose control. So, what would that be? Something pretty ominous I suspect, so this may be a case of "be careful what you wish for."

Lay your bets, ladies and gentlemen. The game is about to begin!

ebear