Jim Bradley

Why Everyone Is Wrong About the Inflation/Deflation Debate

Chap08: Here's what I'm looking at: In August of 2007 the securitization market seized up (I traded many bonds in this market as it collapsed nearly overnight - fortunately I did not rely on traditional hedging) ... that was when gold took off. During this time, the S&P tried one more time to rally, then fell for 7 months before gold showed any downtrend. Gold and stocks lagged the events significantly.

Then, Gold bottomed and took off 4 months before the stock market and a year before the credit markets.

A casual look at the CPI (not the best stats) will demonstrate that gold, even after eliminating the "froth" in the market in the 80s, did not protect any investors against inflation as it persistently sold off for two decades.

Gold was also uncorrelated to the dollar for a long time, as gold fell and the dollar rose or fell ... that is until more recently.

Basically I think the argument that gold responds to "inflation" and "deflation" hasn't been well verified over time. In fact, we haven't had real deflation (contraction of spendable funds and declining prices) by any measure, until just recently.

Take care.

On Oct 15 08:17 AM chap08 wrote:

> If everyone is wrong, would that include you too Jim? I think this
> is a good article and you have a number of things right, but I disagree
> with you on gold. You note "the huge fall in the price as inflation
> continued for decades". What you are talking about is a period of
> declining inflation (from the start of Volcker's medicine and then
> thru the 90s). Inflation fears disappeared. That's why gold fell.
> It went from a period of inflation panic to one where inflation risks
> were forgotten. Gold turned upward again when commodity prices and
> inflation fears returned in this decade.
>
> In your theory, the gold price depends on a "solid foundation under
> dollar assets - and the foundation can be broken by either a higher
> risk of price inflation or price deflation". If that was the case,
> then gold would have raced up when doubts about the "solid foundation"
> and deflation fears came to the fore last year right?? Wrong, gold
> fell ~30% and bottomed at the peak of the panic. Equally, gold would
> have sold off as confidence in the "solid foundation" returned this
> year, right?? Wrong, gold has rallied ~45%.
>
> Gold is where it is because we have policies that lead to a weak
> dollar and inflation. If we turn back towards deflation and get a
> dollar rally, then gold will do what it did last time and sell off
> 30%.