Deflation could be the biggest threat to the economy, but gold -- usually an inflation hedge -- is reaching new highs. That's because smart investors aren't playing the inflation trade, they're buying currency crisis insurance.
With the amount being spent by the public sector, with the huge amounts of leverage still in the system, there's a palpable fear that America won't be able to meet its obligations. Relative to GDP, the amount we're borrowing to finance deficits makes us look irresponsible.
When such economies hit a wall, investors make a run on the currency, typically moving their assets to a stronger currency, like the dollar.
But this time the problem is the dollar, along with other leading paper currencies, all of which are threatened by profligate fiscal and monetary policies. So some investors want out of the system entirely. Gold, as my colleague Neil Collins noted earlier, is a way to do that.
The gold market is small enough that a decision by a handful of money managers to increase their asset allocation from, say, zero to 5 percent can move the market. All the gold ever mined would fit aboard an oil tanker; its total weight of 125,000 tons amounts to a few hours' output for the U.S. steel industry.