Gold Doesn’t Care If It’s IN-flation or DE-flation 43 comments
an article to
-
Font Size:
-
Print
- TweetThis
Gold doesn’t care if it’s inflation or deflation.
One of the central arguments for financial commentators right now is whether the US is currently facing inflation or deflation. Everyone (at least everyone with a functioning cortex) is aware that the US (and the rest of the world for that matter) will face more difficult times ahead. However, whether it will be an environment of increased inflation or increased deflation is up for debate.
Personally, I have been in the inflation camp for some time now. However, when it comes to investing, it never pays to grow complacent with one’s thinking. So I did some research into how gold performed during inflationary vs. deflationary periods. The results were rather shocking, to say the least.
According to Scott Reamer of Vicis Capital, gold and the dollar index has shown an inverse correlation of -.28 over the last 17 years. Now, a correlation of -1 would be a perfect inverse correlation, meaning that every move the dollar index made would be mirrored to the inverse by gold (the dollar falls 1, gold would rise 1).
As Reamer points out, a correlation of -.28 is not a strong correlation at all. So to claim that gold will spike if the dollar rolls over because the two are inversely related is overly simplistic. A far more reasonable assumption would be to say that should the dollar collapse, gold will rally due to safe haven seeking by investors.
Indeed, it is gold’s status as a safe haven of wealth (the ultimate currency if you will), NOT its inverse relationship to the dollar, that makes it so special. Gold has been the ultimate storehouse of wealth going back thousands of years. But what’s truly remarkable is that it has maintained this quality even during periods of DE-flation.
The ultimate text on this matter is Roy Jastram’s The Golden Constant. I don’t recommend looking for or reading this book because a) it’s out of print b) it’s a very dense read.
To summarize, Jastram performed a study of gold’s performance over a 416-year period in England’s history (from 1560 to 1976). He found that historically, gold has acted like a storehouse of value throughout wars, plagues, and the like. However, what’s most striking is that gold actually INCREASED its purchasing power during periods of DE-flation.
Deflationary Periods in England | Purchasing Power of Gold |
1658–1669 | +42% |
1813–1851 | +70% |
1873–1896 | +82% |
1920–1933 | +251% |
This last point is absolutely extraordinary when you consider that the thought pattern “gold rises in inflation and falls during deflation” is one of the most commonly believed investing mantras out there. Indeed, gold has undergone a seismic shift in the last year, largely due to inflationary concerns.
Consider the following: Global gold demand jumped 38% in the 1Q09. Three years ago, demand for gold as an investment only comprised 10% of global gold demand. Today it’s over 30%. That’s an unbelievable increase in investment demand.
From an anecdotal standpoint, I’ve begun hearing numerous “we’ll pay cash for gold” radio advertisements. And just yesterday at the gym I saw G. Gordon Liddy on TV touting gold as king and the dollar as garbage (he actually crumpled a dollar bill up on camera). When a guy like Liddy (central architect of the Watergate break-in) becomes a spokesperson for distrusting the government, then you know the general public is growing anxious about the currency.
But my main point is this: Gold will perform well in ANY investment environment going forward, whether it’s inflation OR deflation.
If the dollar rolls over and tanks, gold will benefit greatly from a flight to safety or a desire to seek a non-fiat currency.
And as Jastram’s book shows, if deflation takes hold (as credit and household wealth contracts further) gold will ALSO perform well just as it did during numerous deflationary periods between 1560 and 1976.
How’s that for a win-win?
Good Investing!
Disclosure: I am long gold
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Coin shows are the BEST place to purchase gold & silver. Most major shows have 30-60 major dealers COMPETING for business in the same convention room! Comparisons and sound decisions are made a lot easier when you confront many sources face to face in the same arena. Also most shows are on Saturdays when the markets are closed and prices are stable. Physical possession is mandatory...no paper investments are sound.
What might help people understand precious metals better is to simply point out that gold or silver can never "increase in value", since they are what they are. Rather, it is a matter of people losing confidence in paper money which causes the nominal price of gold and silver to rise.
Calling gold (or silver) the ultimate "store of value" is just another way of saying it is the ultimate "store of confidence".
P.S. Swashbuckler, as first predicted by John Williams, the U.S. is heading for a "hyperinflationary depression" (i.e. the worst of both worlds).
I agree with you except for your last assertion.
If the DOW crashes to 1000, a deflationary event, gold will not necessarily "move up".
It will likely hold steady and therefore be able to purchase more DOW shares, or whatever, than it does today.
But, I'll take that over any of the alternatives.
On Jun 24 08:56 AM Swashbuckler wrote:
> I've read many fine articles on SA that claim that INFLATION is imminent
> because of the asinine deficit spending and money printed by our
> elected representatives. I have read equally compelling articles
> on SA that flatly state that DEFLATION is here now and will accelerate
> because of the deleveraging necessary to purge the excesses of the
> past few decades. I do not pretend to know which school of thought
> is accurate. I do know that many in each camp are utterly convinced
> that they are right and the other side is horribly wrong. I am glad
> I read this article, as it makes a good case for what I have long
> suspected---that in ANY major monetary crisis gold is likely to make
> a big move up.
mechonomic.blogspot.co...
On Jun 24 10:07 AM yellowhoard wrote:
> Swashbuckler,
>
> I agree with you except for your last assertion.
>
> If the DOW crashes to 1000, a deflationary event, gold will not necessarily
> "move up".
>
> It will likely hold steady and therefore be able to purchase more
> DOW shares, or whatever, than it does today.
>
> But, I'll take that over any of the alternatives.
Now, that gargantuan paper behemoth is seeking ways to stay whole and is re-discovering gold, the storehouse of wealth for thousands of years.
Gold may go down or up tomorrow but be assured on each drop in price a little more of that paper moves into it and will continue to do so until faith in paper as a store of value returns. By all means, play the market, but book winnings in gold.
(I bought gold in november but hapily sold in march)
Good point Albert, but it ignores the fundamentals. How can you have price "stability" with soaring demands, runaway currency printing and unsustainable debts? Something has to happen over the next few years before we once again see stability.
On Jun 24 11:11 AM Albert Ling wrote:
> But what if what we have is neither inflation nor deflation, but
> price stability instead... should a coin of 1oz gold still be worth
> 10 iphones 3G? I think the latter has more "intrinsic value", to
> use goldbug terminology!
www.e-elgar.co.uk/Book...
On Jun 24 09:49 AM Jeff Nielson wrote:
> A very solid article.
>
> What might help people understand precious metals better is to simply
> point out that gold or silver can never "increase in value", since
> they are what they are. Rather, it is a matter of people losing confidence
> in paper money which causes the nominal price of gold and silver
> to rise.
>
> Calling gold (or silver) the ultimate "store of value" is just another
> way of saying it is the ultimate "store of confidence".
>
> P.S. Swashbuckler, as first predicted by John Williams, the U.S.
> is heading for a "hyperinflationary depression" (i.e. the worst of
> both worlds).
On Jun 24 01:35 PM Swashbuckler wrote:
> "hyperinflationary depression"------Terri... can't wait.
Also agreed that it is hugely underrepresented in investment portfolios. However, one must be aware that jewelry demand (which forms a significant portion of overall gold demand every year) is inversely proportional to gold price. If you see gold buying in China, India and the Middle East, it is highly elastic and tapers off during price spikes. Furthermore, looking at the rise in investment demand, a great deal of demand is coming from the ETFs (GLD bullion holding stands at over 1.1K tonnes up 83% for the year). The majority of GLD holders are retail investors and the fast money crowd (HFs). That is not stable demand -- the sentiments there could change on a drop of a hat.
The biggest risks to gold is economic growth and stability. While we might trade around our opinions there, I wouldnt want to bet against it long-term. In other words, other than insurance (a low/mid single-digit %age of portfolio), it would not be part of my long-term portfolio. Trading opportunities do come along from time to time, but I bear no illusion as to gold saving my wealth during rampant hyperinflation (such "revolutionary" periods change too many variables).
Q1 for 2009 data is now available on the World Gold Council site, and investment demand exceeded jewelry demand by 80%. Jewelry demand is now irrelevant to the gold market.
On Jun 24 01:40 PM odin wrote:
> Over the long-term, I am bullish on gold and believe it has a valid
> place in a portfolio.
>
> Also agreed that it is hugely underrepresented in investment portfolios.
> However, one must be aware that jewelry demand (which forms a significant
> portion of overall gold demand every year) is inversely proportional
> to gold price. If you see gold buying in China, India and the Middle
> East, it is highly elastic and tapers off during price spikes.
> Furthermore, looking at the rise in investment demand, a great deal
> of demand is coming from the ETFs (GLD bullion holding stands at
> over 1.1K tonnes up 83% for the year). The majority of GLD holders
> are retail investors and the fast money crowd (HFs). That is not
> stable demand -- the sentiments there could change on a drop of a
> hat.
>
> The biggest risks to gold is economic growth and stability. While
> we might trade around our opinions there, I wouldnt want to bet against
> it long-term. In other words, other than insurance (a low/mid single-digit
> %age of portfolio), it would not be part of my long-term portfolio.
> Trading opportunities do come along from time to time, but I bear
> no illusion as to gold saving my wealth during rampant hyperinflation
> (such "revolutionary" periods change too many variables).
"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Funny point, but I disagree with the assertion that gold "has no utility." Gold has a multitude of uses:
geology.com/minerals/g...
And remember, Buffett was the guy who made the HUGE bet on silver about 10 years ago, at something like $5 an ounce. He famously said: "I bought it too soon. I sold it too soon. Other than that, it was the perfect trade."
On Jun 24 03:38 PM Trent Hauck wrote:
> What is gold good for besides looking shiny. I think that this idea
> is starting to be perpetuated among many investors and that is why
> I don't like gold really at any levels. It may hover around 1000,
> it may break out, or it may fall, but I wouldn't want to bet any
> of those. Usable hard assets will rule it I were to guess.