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Nearly all my instincts tell me to side with the gold bulls. We've had a record global expansion of money. There's no end in sight to artificially low interest rates. Both European and American central bankers still face sluggish economies, putting pressure on them to resist raising rates even when signs of inflation start showing up. Surely, I think, it's time to hedge against inflation by buying gold.

And yet.

The gold trade has been too popular for too long. And it is popular for some pretty bad reasons.

Many believe gold will rise because inflation will certainly get out of control, because central bankers are "debasing" the currency. That, however, is not analysis. That's moralizing. What's worse, it's flawed moralizing.

To begin with, it is based on a misunderstanding of inflation.

Inflation, properly speaking, is not equivalent to rising prices. It is really just the artificial growth of the money supply. Its most dangerous effect is not rising prices, but economic distortions that result in asset bubbles. These are very dangerous for central bankers to detect, much less ameliorate. And they can be economically devastating.

Rising prices, on the other hand, are not as big of a problem. They punish savers, but we have precious few of those in the United States lately. What's more, rising prices, unlike asset bubbles, are easily detected by central bankers and can be halted by stopping the growth of the money supply. So-called "hyper-inflation"—which is really just out-of-control price inflation—is not even a realistic possibility in the United States. It would require the political will to wipe out the value of the dollar and dollar-denominated debt.

Think about that the next time someone says we're headed for hyper-inflation. Does this analysis make sense? Are our monetary policy makers really going to try to wipe out dollar denominated debt?

Of course not. Just look at who would benefit and who would lose.

Winners:

• Homeowners who would see their mortgage debt quickly shrink in relation to their wages; rapid price increases would float the boats of homeowners holding underwater mortgages.

• Politicians worried about the debt burden our budget deficits impose on future generations.

Losers:

• The banks that own most of the financial assets in the United States, including huge amounts of mortgage debt.

• The minority of Americans who have been saving more than they have been spending.

• Foreign holders of US bonds.

Now ask yourself, who is in charge of monetary policy? Does the Federal Reserve seem principally concerned with the plight of underwater homeowners? Or is the Fed focused on the banks? Have politicians been resolute in their concern for the debt burden being imposed on future generations? Has the political elite of the United States turned against foreign power brokers, or do they see their interests and future goals as aligned?

Exactly. So, throw hyper-inflation out the window.

Even non-hyper but very high inflation is probably not in the cards. It's simply not in the interests of the financial elites in the United States.

So I'm wary about following my instincts when it comes to gold. My analysis tells me that much of the thinking behind the gold trade is wrong.

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