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Gold May Do Well During the Later Stages of Deflation
George Washington’s Blog
Friday, Oct 24, 2008
Most people agree that gold does well during periods of inflation.
But what about during periods of deflation?
Leading economist Dr. Marc Faber wrote in October 2007 that gold will do well even in a deflation:
How would gold perform in a deflationary global recession? Initially gold could come under some pressure as well but once the realization sinks in how messy deflation would be for over-indebted countries and households, its price would likely soar.
Therefore, under both scenarios – stagflation or deflationary recession – gold, gold equities and other precious metals should continue to perform better than financial assets.
Faber’s argument is supported by the following charts showing gold’s performance as compared to the yen during Japan’s “lost decade” of deflation:
Japan’s deflation didn’t definitively end until 2007 or 2008.
This provides some evidence that gold may tend to hold or increase its value at least in the later part of the deflationary period as compared with the relevant national currency.
(Article continues below)
Moreover, about half the time, gold has risen during recessions in the United States:
(The grey vertical bars show periods of recession; if your browser is cutting off the right edge of the chart, click here for full image; the chart gives gold prices in monthly averages).
Close examination shows that gold often falls during the beginning stages of a recession, then rises in the later stages of the recession.
Remember that gold is supposed to be a save haven investment during times of uncertainty and instability. Plain vanilla recessions are not really times of uncertainty or instability, so the tendency of gold to rise in deflations should hold more true than during recessions.
See also this.
Note 1: If you want to see my forecast as to future deflation and inflation trends, read this.
Note 2: Conventional wisdom is that gold goes down in a deflation.
Note 3: On the other hand, some people argue that gold did well during the Great Depression, proving that it will do well in all future deflations. However, the Great Depression is not an accurate test for how gold performs during a deflation because (1) the U.S. was on the gold standard then; and (2) the government arbitrarily set the price for gold as part of the gold confiscation program, so the price of gold was not a free market price. Ignore any analysis of how gold performed during the Great Depression that doesn’t take these factors into account.
Note 4: It is possible that factors external to Japan drove up the price of gold against yen during Japan’s lost years. Further analysis is needed.
Note 5: I am not an investment advisor and this should not be taken as investment advice.
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9 Responses to “Gold May Do Well During the Later Stages of Deflation”
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October 24th, 2008 at 5:53 am
As Gold goes lower I would recommend you increase your physical reserves as much as possible. I understand there is an actual shortage and this super low price is in direct contrast to that reality, but if you can get your hands on it at these cheaper rates why not. Also as I have said before, if you cant afford an Oz of Gold then get an OZ of SILVER. Not a prob both can trade as money under any given circumstance. Happy Hunting for the shiny stuff…
http://www.youtube.com/watch?v=C6KMYms8is0
Since this is like the 87′ Crash Over and Over…
October 24th, 2008 at 7:29 am
The problem is not deflation but INFLATION of the money supply, especially after Baron Von Moneypant’s (hereafter known as B.V.M.) bailout. Think of it this way… imagine that instead of money we are discussing donuts and coffee. Donuts and coffee are a great thing, in great demand, UNTIL the day that you get sick of eating too much donuts and drinking too much coffee and on that day you want to vomit. Then along comes B.V.M. and his “bailout cure” saying, “Here, my friend, what you need to make you feel more better – is MORE donuts and MORE coffee!” At this point, most sane people would start making nooses for those politicians and bankers who are continually offering more and more usurious/fiat crap.
Money 101: INFLATION is adding more fiat paper to the money supply and lowering interest rates.
DEFLATION is when the money supply contracts due to raised taxes or rising interest rates.
It is clear that deflation is NOT the problem. Dunk that in your coffee.
October 24th, 2008 at 10:15 am
The bailout money is sitting in banks – It’s not circulating in the economy and won’t until mid 2009. This is what is causing deflation. The banks need to make loans and get it circulating before any type of inflation will occur. So the price of oil, gold, silver etc… will continue to drop until the money gets out in to the system.
The dollar is increasing in value so a single dollar will purchase more gold, and hence gold drops in price. As assets are destroyed there is a lost in dollars and deflation (a dollar is worth more than it was because there are fewer of them).
Hold on to your gold but at the same time pray the system doesn’t come to halt because none of us will gain anything if this happens.
October 24th, 2008 at 10:17 am
If the bailout money doesn’t get in to the system or the system fails and comes to a complete stop then CASH (dollars) will be of more value than Gold/Silver.
It’s a good idea to have both
October 24th, 2008 at 11:04 am
this site has been promoting gold going up to $2,000 an ounce because Genesis Communications runs this site and are the Midas Gold people. That is why they so push gold in their partnership with Alex Jones. I’ve believed what they wrote about Gold going up and invested in the GLD stock only to lose thousands of dollars the past couple of weeks since I switched from a very safe money market account. I’ve shed $20,000 in a matter of a few weeks. Take it from me, this site isn’t always a good gage to use when evaluating gold. Plus, under Martial Law, the govt will confiscate the Golden Eagle, all bullion. The govt will reduce the price of gold buillion to $50 an ounce after Martial Law. I no longer see gold as a viable investment option. I’m keeping it in for the next few weeks and if it continues to shed I’ll simply take the loss and move on.
October 24th, 2008 at 2:25 pm
Alex is weak when it comes to doing simple math, spelling and economics.
Made a big FUBAR in his Thursday show. Quoted gold moving between $750 to $800 but take a look at the chart. http://www.kitco.com/charts/livegold.html
It’s an ugly chart. If you know how to read charts, the chart is bearish short term. It should go down from here before it goes up.
This infraction of misquoting the price of anything while being employed on “the street,” would cost you your job.
I too don’t buy the gold thing. If push comes to shove, you can’t eat it.
I do love the soap guy. Having enough food in the house for a long time in case of emergency is cool.
I like Alex when he sticks to doing the things he does best; namely, investigative journalism, great guests, 911, and critique of the news. He is great when he sticks to the news and the stuff hidden in plain sight.
His Patriotic passion to “defend the Constitution from all enemies foreign and domestic” is the thing that is driving the growth. He fights for the disenfranchised and the little guy. He does many things well.
When he can’t keep still and concentrate on good questions during an interview, starts selling snake oil gold, and turns a blind eye to his moderators that have a habit of pissing off his base with capricious banning, I start to fear Alex is nothing but a fad.
Still, at the end of the day, Alex is great when he sticks to doing the things he does well.
Don’t ask him to spell, do simple math, dust off those “European” economic books he has on his shelf while chewing gum. But do give Alex credit for great guests like Paul Craig Roberts.
October 25th, 2008 at 11:43 am
Listening to some of the previous comments, reminds me of Judas selling out the Christ man.
Do you guys even listen to the show, the ones that are dogging on the gold investment?
With all the reasons for it going up–the inflation, inflation, inflation-that hasn’t happened as of yet.
Be patient, or be a sheeple with gold, either one; don’t be a dumbass and sell your gold just cause it’s dropped in value due to every day occurences in the market. If you need a fresh perspective, go to Kitco.com, and check the cost of gold in 2002, 2003, 2004, then compare it to 2008. It’s shot up well over 100%, it’s a lot more, but I’m tyring to be simplistic.
If you “listen” to the shows, that means hear the words, internalize, initiate(do something). Then you would buy gold and hold on to it, and do your damnest not to let anyone know that you have it, especially the gov’t. The SUPPLIES ARE DWINDLING, trust me, you need to look at that fact more than what you see in the gold price. You’re going to drive yourself nuts if you nitpick at the everyday fluctuations.
The shit hasn’t hit the fan just yet (the major inflation), that’s coming-have some faith.
Plain and simple: If you have it-keep it; if you don’t have it-work your ass off at getting some (try calling a dealer, they’re all out).
P.S. Stop listening to all these whiners who may not be educated to the hollistic perspective. Gold is going to go up but it will bottom out first. However, that really doesn’t matter if you don’t have any when it eventually shoots up.
October 25th, 2008 at 2:47 pm
riiiight. gold has certainly been a stellar money making investment…….for the promoters and shils. silver has fared even more poorly.
October 26th, 2008 at 1:15 am
C.M., under martial law, the way Dubya has expanded on what Nixon set up when we weren’t looking, the government can confiscate more than your gold and guns. Say adios to your car, household effects, and real property, which you won’t need anyway when you are sent to the work camps while military personnel are housed in your domicile using your Sunday best china as skeet. FEMA is coming, but NOT to help you and your family…