Donald Luskin, the chief investment officer of investment strategy firm Trend Macrolytics, is nothing if not opinionated. A weekly contributor to CNBC's "The Kudlow Report" and SmartMoney.com, he's a leading - if occasionally controversial - voice on the politics and policy that drive global markets. HardAssetsInvestor.com caught up with Don to get his take on the outlook for gold and inflation.

HardAssetsInvestor.com (HAI): Don, you've been on record as a bit of a gold bull in the past, and have made some pretty insightful comments in the press about things like how IMF gold sales may impact the market. What is your take, in a nutshell, of where gold goes over the next year?

Don Luskin (Luskin): I think a year from now, gold is going to have a very bimodal result pattern. As we're talking [April 17, 2009], gold in the futures market is at $883 per ounce. A year from now, it will either be double that or half that; nothing in between.

HAI: That's a fairly bold statement. You don't see any world where gold has just drifted a bit higher or lower?

Luskin: I regard gold as substitute money. So when you ask, "What's gold worth?" to me, what you're really asking is "What is the expected value of money?"

If the financial crisis deepens and the world's demand to hold safe-haven balances increases sharply again back to the levels of panic that we saw last October, November, December, then the world will be plunged into a monetary deflation; deflation defined as extreme appetite for money as opposed to any asset or any thing - a desire for the complete safety of money.

So when the demand for money completely outstrips the supply of money, you get deflation. In that kind of world, even gold isn't a safe haven; the only thing that would do is liquid money.

HAI: So that's the downside scenario.

Luskin: Right.

On the other hand, the response of the central banks of the world to the crisis - to keep that scenario I just outlined from happening - has been to print money. If you look at the Federal Reserve's balance sheet, you'll see something you've never seen before in history: The assets and liabilities of the Fed balance added together now represent something like 30% of the assets and liabilities added together of the commercial banking system. That's completely unprecedented. The asset side of the Fed's balance sheet has almost tripled in the last four or five months.

When the Fed acquires assets, it has two ways of doing it. It can borrow money from the world - taking on liabilities - and then buy assets with it. That's what everybody else does to acquire assets in a hurry. But when the Fed wants to acquire assets in a hurry, it can do something that no other entity can do legally. It can just simply print the money.

If you do that, it's called counterfeiting. When the Fed does it, it's called monetary policy.

HAI: Right.

Luskin: So the Fed has engaged in this record amount of money printing in response to this extreme surge in money demand that we experienced when the credit crisis hit late last summer. In that sense, it's an appropriate response: It's meeting money demand with money supply. It's no different than a farmer who might go out and madly plant apple trees in order to increase the apply supply to deal with a surge in apple demand. The prices of apples won't change as long as supply and demand are kept in some kind of harmonious, stable relationship.

But problems occur when one side - supply or demand - nonlinearly gets away from the other side. So while the Fed has done approximately the right thing by meeting this money demand with money supply, the change in the money demand is so dynamic right now that if we were to get any kind of recovery in the world's economy, any kind of restoration of confidence, you'd see that money demand start to ebb. You'd see people wanting to own securities and "things" instead of simply hold liquid balances, and then the challenge would be on the Fed to extinguish all of that new money supply as quickly as it created it.

The Fed may very well do that, but if they got it right, it would be the first time in history.

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