Elliott Wave University

Back in 2002 Gold was a hated asset. No one wanted it. Even though the tech wreck and dot-com bubble had burst no one wanted Gold. As I’ve said many times Gold is a crisis hedge more than an inflation hedge. And it is a good barometer for the fear of financial catastrophe. Contrarian newsletter writer Steve Sjuggerud calls it “financial catastrophe insurance” and asks “When is catastrophe insurance the cheapest? When there hasn’t been a financial catastrophe in decades.” But as we teeter on the brink of catastrophe, the premiums on this insurance keep going up and up.

Gold has been steadily climbing since 2002 with a slight decline during the middle of the crisis itself in 2008. I have often been asked why if gold is crisis insurance would it fall during a crisis? And the answer is simple. Gold was the only thing that wasn’t simultaneously a debt for someone else. So with prices falling like a rock for all paper assets because there were no buyers, if someone absolutely needed to raise cash they had to sell the only asset they had with true value. That was gold. But there were limited buyers with cash available so those buyers could pick up the gold at “fire sale prices.” And a Fire Sale is a very good analogy in this case.

Warren Buffet is the king of fire sales. He is known to stockpile billions of dollars in cash, so he can sweep down and pick up assets at fire sale prices when the time is right. Gold is no longer at fire sale prices but it is not at its inflation adjusted highs either. See “Gold is a ‘Crisis Hedge’ not an  Inflation Hedge.”

In 1980 at the last peak in the price of gold the fear was that the economy would collapse due to inflation. So gold was perceived as an inflation hedge but this time around the fear is of a collapse due to too much debt. So looking at the price of gold strictly in inflation adjusted terms is not entirely accurate. This time gold is a debt hedge. Remember physical gold is the only investment that is not simultaneously someone else’s debt. So what better to insure against a debt crisis? How much debt is out there? Surprisingly no one really knows because of the creation of Credit Default Swaps and other derivatives the amount of debt has multiplied all out of proportion. Add that to the government debt and there are untold trillions of dollars of debt sloshing around. And Gold is the ultimate insurance against all that debt.