A few weeks ago the gold rush was back on.

Inflation fears were rising. Yields on treasury bonds were rising. Gold was making another run at $1,000. Leading the headlines though and sparking the most interest was hedge fund manager John Paulson and his big bets on gold and gold stocks.

Since then, interest in gold has cooled quite a bit.

The latest Consumer Price Index reading quelled inflation fears and put deflationary risks back in focus. The U.S. government's measure of inflation indicated prices fell 1.3% over the past year. It was the biggest decline since the Truman Administration.

With deflation taking the lead, an ounce of gold has fallen more than $60 per ounce. Silver's run was quickly halted too. Even the mainstream press, which was really getting behind gold for a while, is getting on board too. A New York Times article from the weekend explains, “Why Inflation Isn't the Danger.”

But here's the thing, inflation is coming. Everything is in place. And right now, with fears of deflation being Wall Street's main focus, the window of opportunity is opening up again.

Some of the world's best investors are taking advantage of the opportunity. Some of the world's leading commentators are not. Which side do you want to be on?

The “Smart” Money

Back in February we looked at how billions of dollars were flowing into gold companies' coffers. Whether the gold companies were looking for debt or equity financing, they could get as much of it as they wanted.

The “big money” wanted gold and they were willing to cut sizable checks for it. Since then, a lot of big money managers have taken a liking to gold too. The list of prominent gold (or gold stock or gold ETF) buyers has been steadily growing.

A few weeks ago, Northwestern Mutual Life Insurance announced it had accumulated $400 million worth of gold. It was the first gold purchase in the company's 152-year history. When asked why his firm was buying gold, Northwestern Mutual's CEO simply replied, “Gold just seems to make sense; it's a store of value.”

It's not just the third largest life insurance company in the U.S. buying gold though. John Burbank's Passport Capital recently said it increased its gold exposure significantly too. According to a recent SEC filing, the fund had increased its SPDR Gold Shares (GLD) holding by 6,717% in the first quarter of 2009. SPDR Gold Shares (GLD) now account for 7.9% of Passport's portfolio.

Basically, interest in gold as an investment is growing. And it's slowly moving beyond the top-performing hedge fund managers like John Paulson and David Einhorn.

In the markets, we can't forget that for every buyer, there's a seller. And right now, one of the doom and gloomers who really made a name for himself during the most recent downturn says gold is overvalued.

Roubini: “Gold looks toppy.”

Last week Noriel Roubini threw his hat into the deflation/inflation ring. The man who has become one of the rockstar commentators of this downturn (every boom or bust seems to create new investment “rockstars” – that is until their next big call) recently revealed his feelings about real assets.

At the Reuters Investment Outlook symposium, Roubini warned:

For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits. It may be too soon to hedge with gold.

Unless we have high inflation, or...other risks like depression, gold looks toppy.

Deflation? Too soon to hedge with gold? Toppy?

These aren't “on this hand…on the other hand” types of words used by most economists. This is a firm prediction inflation isn't a concern at the moment and won't be for some time.

So who's right and what should you do?

Buying on the Dip

Well, here's the thing. Both sides of the gold argument make sense. All past bubble-booms have ended in deflation. However, the central banks and governments of the world are doing a lot to prevent it and still have a lot of arrows left in the quiver to prevent a deflationary spiral.

When it comes to history though, inflation always wins out under the current conditions. As we looked at in a historical perspective of the inflation vs. deflation debate a few weeks ago, the last few times U.S. government spending reached these levels (as a percentage of GDP), the consequences, which were always the same, followed close behind.

In 1861, the Union printed more money, borrowed everything it could, and spent it all to fight back the “rebels.” Inflation between 1861 and 1865 ended up at 117% for the period. That's 16.7% on an annualized basis. 

In 1917, President Woodrow Wilson aggressively emptied the government coffers in World War I. Prices increased 126% between 1917 and 1918. That's a 50.3% annual rate.

In the 1940's we went through it again. The U.S. involvement in World War II forced another surge in government spending. This time the prices rose 108% between 1941 and 1945. That works out to a 15.7% annual rate of inflation.

It seems so obvious right?

Frankly, it is obvious to many.

In the end, we can't forget how the markets work. Assets everyone wants get premium prices and unwanted, out-of-favor assets go for next to nothing. And the safest and largest gains are found in buying the unwanted assets and waiting for them to fall back into favor.

And right now, while deflation takes the lead in the inflation/deflation debate, it's giving us a chance to protect ourselves from the coming inflationary wave inexpensively.

If you're looking to buy gold and undervalued gold stocks on dips, right now is definitely one of those dips.

Good investing,