Nikhil

Is It Time to Buy Gold?

Gold is considered a hedge against inflation primarily since it did well in the 1970s inflationary time and since it didn't do well in disinflationary (mind you not deflationary) 1980s people extrapolate that gold would not do well in deflationary times. I read a very interesting paper which talks about golds behaviour in deflationary times (there have been 7 of those since 1800s). The one in 1818 is not documented well, so omitting it, in the rest of the deflationary times gold mostly (5 out of 6 times) outperformed paper currency (irrespective of whether we were in a fixed or floating rate exchange regime). The critical factor in determining golds performance is the credit quality of the issuer of the paper currency, if that deteriorates people tend to choose gold as a hoarding vehicle over paper currency.

Am not a gold bug, in fact have started studying the market recently but tell me something, even if inflation doesn't show up sometime soon, all the measures that the gov is taking to tackle the deflation are directly/indirectly going to cause the devaluation of the dollar (even the gov would like a gradual devaluation since that would work against deflation) and hence will be good for gold. Hence I think the conventional wisdom that gold would do well 'only' in an inflationary environment is flawed, a deflationary environment has been really good for gold.

Is It Time to Buy Gold?

CLH, could you please go back to 1930s and see what happend to the dollar, it was devalued against gold to tackle deflation.


On Dec 05 08:27 AM CLH wrote:

> The best article I have read on "should I buy gold". We are in the
> worst deflation since 1930s and the dollar is soaring, however most
> think gold will save them. Dumb dumb. Keep your money in dollars
> not gold.