Of course the Schiff/Austrian 'sound money' prediction of runaway inflation depends wholly on the Quantity Theory of Money.  This theory is a simplistic one that merely states that more money in circulation must dilute the money's value--through prices rising. It sounds quite sensible on the surface and is easily grasped. Explaining this principle to anyone seems to always result in their nodding agreement. In addition, in certain types of more primitive economies, the truth of the theory is undeniable. But with the potential consequences so profound, we must look closely at this theory. The theory should be examined inside and out, as well as compared to the historical record. Before blind acceptance, we must be able to explain the mechanism for this supposed dilution. (Nobody has ever done this!) That is, we must be able to trace a plausible microeconomic chain of events leading from new money being created to a business responding by raising its prices.  Such a deeper look has been virtually ignored in the field of economics.  "More money chasing the same amount of goods causes inflation" has been repeated like a mantra for so long that virtually no economists have asked, "How?"

We must seek to understand how, by examining relevant questions: "What is it about more money in existence that might cause businesses to begin raising prices?" "Would businesses be able to start raising prices based merely on abundant money, or would competition keep the increases in check?" "If competition puts a damper on any one business starting the inflationary process, what types of businesses would have the freedom to raise prices, and would they do so?" "Does more abundant money necessarily equal 'easier' money, i.e. will the perceptions of the money's value by the members of the economy change?" "When the Fed creates new money, how does it enter the economy, i.e. who are the direct recipients, how will they view this new money, and will it be 'cheaper' for them to obtain?" "Which businesses keep an eye on the aggregate money supply in their pricing decisions, if any?" "Is there a difference (vis-a-vis the 'Quantity Theory') between a commodity (or commodity-backed) money vs. a fiat money?" "How important is the money's physical visibility, i.e. a currency-based economy vs. a credit economy?"  These questions and others require careful thought before jumping to conclusions about inflation. Yet very few economists seem to consider any of them. Understand that Schiff and other hyperinflationists adhere completely to the simple 'Quantity Theory' when they proclaim that inflation will run wild. They haven't looked any further than the basic assumption of the theory. I have thought much more deeply about the mechanisms of price inflation due to the money supply, and present my conclusions in Chapter Five of my book. They are compelling. I am virtually certain there will be no runaway inflation in the US, let alone hyperinflation, even if the money supply (M1, M2, MZM, etc.) is to double or more. I also see it as quite unlikely we will experience inflation even as high as 1970's levels*, unless energy and raw material prices rise sharply, or China radically alters its currency's peg to the dollar. [Input price hikes are always real, while any money supply induced inflation would be largely psychological in an economy such as ours.] Because I have confidence that any causal link between new money and higher price levels is a very weak one, I call for a 90% chance of normal, moderate, single digit inflation for the next several years.**  This, of course, is very bullish for today's cheap stocks in an economy that will soon be awash with new money.

No doubt this forecast comes across as anything but humble!  Yet, for as much thought as I give to various economic scenarios and trying to assess possible risks and rewards, I am far more sure of this moderate inflation forecast than most things. I place it at the top of my 90%+ forecasts.

* around 10% annual inflation

Gold climbed mightily during that decade of poor returns in stocks, and it briefly peaked at $800 in 1980. What is forgotten, though, is that gold then died a slow death from 1980 to 2000 to bottom at almost $250. Twenty years is a long, miserable time to lose 75% or more (inflation adjusted), with no dividend. What allowed gold to decline for 20 years? Simply put, zero growth or income. An ounce of gold bullion in your safe is forever just an ounce of gold that yields nothing. Gold investors rely wholly on its price increasing. When the debt crisis and recession are clearly in the rear view mirror, the economy will have resumed growth, which translates into earnings and business growth. Gold is unattractive as an investment when other vehicles have healthy growth and/or yields. Successful businesses (stocks) grow along with the economy so that in 20 years time a retailer, for example, can be serving a larger market and have expanded to new locations.

On the August 5th radio show, in response to a caller, the Euro Pacific host admitted outright that gold is not an investment, but simply an inflation hedge. This should scream "danger" at you. The whole "gold is money" mantra bullishness is reliant upon a flight to gold during high inflation, such as happened in the 1970's. If the inflation and the flight don't materialize, gold will likely fall. Why stock up on gold and silver as an inflation hedge, when any non-cash asset provides that same hedge? Gold has almost quadrupled in 10 years and so appears richly priced. You can get your inflation hedge by holding most anything since big inflation would raise the price of everything. Find some more reasonably priced collectibles, art, real estate, or any type at all of non-cash assets that you have the room to warehouse and you have your inflation hedge. Stocks are also an inflation hedge, as revenues in the inflated dollars translate to profits and share prices also in the inflated dollars.

I am early as a gold bear. I know of no other pundits currently bearish on gold. Yet, I feel 90% sure that at some point in the future $1000 an ounce will be viewed as a high price for gold, rather than a low one.

Update: November 2, 2009 -- This interview with Jon Nadler, a 30 year veteran precious metals analyst, is so informative about the gold market I felt compelled to post this link. He explains how the market's pricing of gold is far more complex than simply being an "anti-dollar" play, and gives reasons why he thinks gold's fundamentals should move it to the $680-$880/ounce range.