Chapter 11. Gold

When the paper system collapses, the survivors will dig in the rubble and they will find gold.

William Rees-Mogg[73]

A continuing theme running through this book is whether the Great Reflation will turn into the Great Inflation and whether the U.S. dollar is headed for the dustbin of history along with the Zimbabwean dollar or the Reichsmark, as we discussed in Chapter 1. There are a lot of people who either believe it will happen or at least think it has a sporting chance. The run-up in the gold price to over $1,200 per ounce in late 2009 and extensive media publicity have added a significant degree of credibility to those who are already persuaded, or on the edge of believing, that the worst is inevitable for U.S. inflation and the dollar.

Has Gold Mania II Already Started?

Gold is the new poster boy, both for the bubble excesses of 2002 to 2008 and more recently because of the much-feared consequences of the Great Reflation. Gold skyrocketed from $280 per ounce at the end of the year 2000 to $900 per ounce before the crash, and to over $1,200 in late 2009. This amounts to a quadrupling of the price in nine years or 17.6 percent per annum compounded. With the exception of crude oil and the Shanghai stock index, gold has outperformed every other major investment class over this period, including commodities, the S&P 500, U.S. bonds, and the Morgan Stanley Capital International (MSCI) index of world stock prices. Figure 11.1 shows gold and these other asset classes ...

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