Why is gold "more" protected than other investments, like real estate?
The answer to this is a little complicated and long-winded, you may have to read this a couple of times to "get it". But first we need to go through some basic definitions. Some of these definitions may seem counter-intuitive and contrary to what is generally accepted but as you will see these are the true definitions of these terms.
Inflation: When we think of inflation we think of an increase in the price of good of services. That's not really true, the rise in the general price level of goods and services (most commonly measured through a Consumer Price Index - CPI) is an after-effect of inflation. Inflation is really an increase in the supply of money and credit. Because there is an increase in the supply of money (and credit) there is too much money chasing (relatively) fewer goods, thus the prices of goods as measured by money (the supply of which has increased) rises.
Deflation: The exact inverse of inflation is deflation; when the supply of money and credit contracts then that is called deflation. Because there is a decrease in the supply of money (and credit) there is less money chasing (relatively) more goods, thus the prices of goods as measured by money (the supply of which has decreased) falls.
An important thing to realize is that an increase in the prices of goods and services is the
result of past inflations. Consequently when there is deflation it will result in
future decreases in the prices of goods and services.
During periods of rising prices and (especially during severe or "hyper"- increases) you do not want to hold cash or cash equivalents. This is because with time can buy less and less of the goods and services you need. Consequently the value of money as measured by the amount of goods and services that can be purchased per unit of said money keeps decreasing. So what do you hold instead? You want to hold assets that can preserve or store value in the face of a general rise in prices. Real Estate, commodities such as Metals, Coal, Crude and Precious Metals i.e. Gold, Silver are such assets - these assets are also called "hard" assets. In fact in extreme increases of prices you want to hold as much debt as possible and use the debt to finance the purchase of these "hard" assets. This is because the rate of interest that you pay on your debt will almost always lag the increase in the value of the asset. Think of it this way: there are two graphs both rising, but the slope of the interest rate is less than the slope of the price increase. As a result Property - which you can easily finance - is a very good asset class to invest during periods of increasing price levels.
So if deflation is the exact inverse of inflation - then during periods of decreases in price levels you want to invest in assets that have the opposite characteristics of "hard" assets and you want to stay away from debt. In fact the only asset class that does well during decreases in price levels is money.
Gold is a very funny asset and has some important characteristics that make it special and different from everything else (including other precious metals such as Ag, Pt etc.)
1. All the Gold ever mined in human history approximately 150,000 - 160,000 tons is still with us.
2. The supply of Gold is very stable and is around 2% of the total Gold supply. It takes around 9-10 years for a new Gold mine to come online and then a further 5-7 years for production to hit the market. Thus from exploration to sale Gold takes about 14-17 years. By which time current Gold mines will be in decline. Thus this supply is not very likely to change over time. In fact in recorded human history there has been only one time in which the supply of Gold has increased dramatically, that's when Spain took the Gold of the Mayas and Aztecs in the 1600s and flooded Europe with it. Thus if Gold were to be used as money it would be relatively free from increases in supply i.e. Inflation.
3. Gold has very little industrial usage - its major use is as jewelery. As you are probably aware in India people often buy and gift jewelry not just for consumption but also as security and to use as money when in need. In fact this is true the world over.
4. Gold is almost indestructible (If I remember right you need Aqua Regia to dissolve Gold), relatively portable.
Because of these reasons Gold has and will continue to be regarded as money. In fact in the Foreign Exchange markets Gold trades like any other currency.
So in a deflationary scenario Gold should do well. I expect the world's industrial economies to fall into a deflationary depression thus the only asset class that will do well is money and it's equivalent - Gold falls in that category.
Why do you say that this worldwide depression is impossible to reverse? Haven't we faced crises of more severe magnitude before, and, come out of it before? Why is this depression more severe than (say) the Great Depression of 1929, starting with the crash of US stock market on the infamous "Black Tuesday"?
I'm not saying this is the end of mankind as we know it. We will get through this, it just so happens that we will fall into a deflationary depression and then with time (5 years, 10 years who knows how long...) we will come out of it. It will be more severe than 1929 (which by the way was exactly the same thing) simply because the magnitude of the deflation is much larger. If you think of it as a wave, the amplitude of the wave is greater by several degrees of magnitude consequently the effects of the wave will be that much more severe.
You say that "cash and cash equivalents" are the best bets to invest in - in that case, why is US dollar is better mode of saving than, say, Euro or Yen? Isn't this meltdown expected to affect all industrial markets?
The Dollar is the best of a worse lot. The Euro has political issues. No currency without the backing of a stable nation state survives for very long. The European Monetary Union is a grand experiment that will unfortunately fail if it is not accompanied by a political union. Japan's economy is in terminal decline because of demographic issues unless they start allowing massive immigration their economy will slowly reduce to insignificance.
