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The world's economic woes may be far from over, but deflation or inflation, gold is as good as it gets, according to Jay Taylor. Jay, whose passion for the king of metals prompted him to pursue geological studies after earning his MBA in finance and investments, has established an enviable track record in the markets. According to webeatthestreet.com, "J. Taylor's Gold & Technology Stocks Model Portfolio has more than tripled its value since January 2000 while the S&P 500 has barely moved."

After a career in commercial and investment banking, Jay now devotes himself full time to researching stocks and producing widely acclaimed publications that have evolved into his weekly Gold, Energy & Technology Stocks newsletter. In this exclusive chat with The Gold Report, he talks about how gold has not only sustained but strengthened its purchasing power vis-à-vis other metals and commodities, tells readers what he watches for when he evaluating companies and explains why the time may be ripe for picking up gold stocks while they remain at bargain-basement low prices.

The Gold Report: It seems we are moving into a deflationary environment. What's your take on what's going on, and what it means for gold?

Jay Taylor: My view of the markets in general changed very dramatically with the Lehman failure in mid-September. That's when we had a real sea change, a real tipping point, if you will, from an inflationary environment to a deflationary environment. This deflationary environment is really changing things dramatically. We're being much more selective with base metal projects and gold projects, as well as uranium. Since the decline started in the financial markets and in the commodity markets, I've shifted my major focus to gold mining. I think that's where the most money is going to be made. The economics for gold mining look outstanding at this point.

TGR: You mentioned the deflationary environment. But doesn't gold normally perform best in an inflationary environment?

JT: That's what people think. Frankly, gold mining does absolutely the best during a deflationary environment. Let me give you some examples as to why that's true. Since the Lehman collapse, an ounce of gold buys 125% more oil than before the Lehman collapse and that was only the middle of September. Since then, an ounce of gold buys 128% more copper than it would have bought on September 12, and 90% more of the Rogers Raw Materials (Rogers International Commodity Index). The real price of gold has risen dramatically and does tend to rise dramatically in a deflationary environment. That was true in the 1930s and especially since the Lehman collapse it looks to me that it's true now.

There's a pretty good reason for that. People buy gold because it is natural money. They would always use gold—and silver to a lesser extent—if they were allowed to choose the money they use as the medium exchange. We're not allowed to. Government tells us we have to use paper money. That's why it's called fiat; it's the money by law, not by market. But when people lose confidence in the fiat currency system, they go to gold. In nominal terms, it's true that gold is down from its highs. But, as I said, in real terms, in terms of what an ounce of gold will buy, it will buy a lot more than it would have a little while ago.

We're also seeing, in the gold mining sector, lower labor costs. Part of the reason is that with copper collapsing in price, with zinc and lead and all the base metals coming down so much, a lot of the base metal mines are closing down and laying people off. That makes lots of labor available now for gold mining and any kind of mining—but gold mining is the one that's thriving and doing better. I expect to see some very much better earnings reports coming out from the major mining companies starting the fourth quarter of 2008.

TGR: As you pointed out, in nominal terms, gold is holding its own and it does appear that we're in a deflationary environment. But is this environment likely to be a short-term blip? Won't the current printing of dramatic amounts of U.S. dollars push us into an inflationary environment? So are we looking at an investment strategy now that's really only going to be a couple of months in duration?

JT: That remains to be seen. I'm not convinced, as many of my gold bug friends are, that printing money has to necessarily result in an inflationary environment. If you go back and look at the 1930s, and if you've read Murray Rothbard's book (America's Great Depression, first published in 1963, fourth edition published in 1983) and various accounts of the 1930s, it seems to me the policies that we're pursuing now are not exactly the same, but basically the same and to a much greater extent now than in the '30s.