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Deflation Is Good For Gold .....

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There is a lot of talk on this site at the moment about the impact of deflation on gold prices.

I am not sure whether this argument has been made before or whether I am framing it in "correct" terms but here goes :

1. A source of deflation is a permanent destruction of the value of financial assets such as we are seeing at present.

2. This destruction of wealth means that there is less "currency" available to pay for goods and services resulting in lower prices for those goods and services which we call deflation.

3. There is an assumption that this also means that gold prices will fall because there is less "currency" around to pay for gold.

4. The failure in this argument is that deflation was caused by a collapse in the monetary value of financial assets which results in the repudiation of monetary assets as a store of value in favour of gold.

5. This is exactly what happened to gold prices measured in USD during the deflationary period of the 1930s in the US and when measured in JPY during their most recent bout of deflation.

My view is that the root cause of deflation (destruction of the ability of financial assets to act as a store of value) could be positive for gold prices in a deflationary environment even while the price of many other assets falls.

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does this mean inflation is bad for gold?

I suspect that mild inflation together with with reduced fears of a low probability high impact scenario of very high inflation would be very bad for gold (something like a 50% decline would not be impossible under this scenario).

It would mean a return to more normal market conditions and the end of the destruction in value being suffered by many financial assets at present.

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There is a lot of talk on this site at the moment about the impact of deflation on gold prices.

I am not sure whether this argument has been made before or whether I am framing it in "correct" terms but here goes :

1. A source of deflation is a permanent destruction of the value of financial assets such as we are seeing at present.

2. This destruction of wealth means that there is less "currency" available to pay for goods and services resulting in lower prices for those goods and services which we call deflation.

3. There is an assumption that this also means that gold prices will fall because there is less "currency" around to pay for gold.

Correct

4. The failure in this argument is that deflation was caused by a collapse in the monetary value of financial assets which results in the repudiation of monetary assets as a store of value in favour of gold.

Correct

5. This is exactly what happened to gold prices measured in USD during the deflationary period of the 1930s in the US and when measured in JPY during their most recent bout of deflation.

Incorrect

My view is that the root cause of deflation (destruction of the ability of financial assets to act as a store of value) could be positive for gold prices in a deflationary environment even while the price of many other assets falls.

What is positive for gold prices is the expectation of currency debasement and subsequent inflation.

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There is a lot of talk on this site at the moment about the impact of deflation on gold prices.

I am not sure whether this argument has been made before or whether I am framing it in "correct" terms but here goes :

1. A source of deflation is a permanent destruction of the value of financial assets such as we are seeing at present.

2. This destruction of wealth means that there is less "currency" available to pay for goods and services resulting in lower prices for those goods and services which we call deflation.

3. There is an assumption that this also means that gold prices will fall because there is less "currency" around to pay for gold.

4. The failure in this argument is that deflation was caused by a collapse in the monetary value of financial assets which results in the repudiation of monetary assets as a store of value in favour of gold.

5. This is exactly what happened to gold prices measured in USD during the deflationary period of the 1930s in the US and when measured in JPY during their most recent bout of deflation.

My view is that the root cause of deflation (destruction of the ability of financial assets to act as a store of value) could be positive for gold prices in a deflationary environment even while the price of many other assets falls.

I dont know whether it will be good or bad during deflation, ultimately i think theres alot more to go in its bull market, although my analysis favours it falling during severe deflation but the point raised is simply not proven by the depression.

THe deflationary period in the states lasted 29 thru 32 that entire period the price of gold was fixed (who knows what the price would have achieved), After 32 the US entered an inflationary part of the depression, it was during this inflationary period the price was reset upwards but that is not the same as saying it went up or held its own during the severe deflation

Edited by Tamara De Lempicka

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4. The failure in this argument is that deflation was caused by a collapse in the monetary value of financial assets which results in the repudiation of monetary assets as a store of value in favour of gold.

Actually I should have said incorrect too.

4 is not a proof of failure of the points you make in 1 2 3, it is the source of counter flows towards gold. Every financial asset price is influenced by multiple factors and you've identified a second factor for gold. It doesn't make other factors (such as the deflationary effect) invalid. Some factors will be predominant at different times pushing prices in one direction or another.

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I dont know whether it will be good or bad during deflation, ultimately i think theres alot more to go in its bull market, although my analysis favours it falling during severe deflation but the point raised is simply not proven by the depression.

THe deflationary period in the states lasted 29 thru 32 that entire period the price of gold was fixed (who knows what the price would have achieved), After 32 the US entered an inflationary part of the depression, it was during this inflationary period the price was reset upwards but that is not the same as saying it went up or held its own during the severe deflation

if you take the whole great depression period - 1929 to 1939. Gold increased during overall deflation. Stocks did not recover until 1950s.

I agree the comparison is clouded as there was a gold standard, but the fact that gold standard could not be maintained at the then price is indicative of the same issues (in my view)

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There is a lot of talk on this site at the moment about the impact of deflation on gold prices.

I am not sure whether this argument has been made before or whether I am framing it in "correct" terms but here goes :

1. A source of deflation is a permanent destruction of the value of financial assets such as we are seeing at present.

2. This destruction of wealth means that there is less "currency" available to pay for goods and services resulting in lower prices for those goods and services which we call deflation.

3. There is an assumption that this also means that gold prices will fall because there is less "currency" around to pay for gold.

4. The failure in this argument is that deflation was caused by a collapse in the monetary value of financial assets which results in the repudiation of monetary assets as a store of value in favour of gold.

5. This is exactly what happened to gold prices measured in USD during the deflationary period of the 1930s in the US and when measured in JPY during their most recent bout of deflation.

My view is that the root cause of deflation (destruction of the ability of financial assets to act as a store of value) could be positive for gold prices in a deflationary environment even while the price of many other assets falls.

Fear is good for Gold. Fear of deflation or inflation will have a similar effect since the desire to buy gold is in order to preserve buying power. During deflation holding cash can have a role but not as against foreign assets. Gold will do better although the headline price may not go up so far. Deflation can apply to the currency more than the price of goods you see for sale at the outset. If we have many currencies competing to devalue (which the Euro/GBP/USD are) that makes it more complicated at first to see what is happening. USUALLY a devalued currency will result in imported inflation. However if the whole world wants to go down the same hole it may appear as deflation first. No doubt the printing presses wil find a way to cause inflation thereafter. If there is a forthcoming 'crash' moment, then it's possible that for a short while gold will fall back, but I doubt for long and not as far as the stockmarket. The usual scenario is that panic selling results in a demand for cash, putting up the USD for a while. Then the fearful cash will find a home with hard assets like gold, silver or platinum.

The fear index (VXX) HAS RISEN over 125% in the last few weeks. So watch out!

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does this mean inflation is bad for gold?

Gold is good for Gold sellers. Gold is another Ponzi scheme, it requires more suckers to keep the price up.

Edited by Peter Hun

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Is there a recent example of gold doing well in a post-gold standard deflationary environment?

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Is there a recent example of gold doing well in a post-gold standard deflationary environment?

There isn't and this is the mistake the 'gold goes up in deflation' crowd makes, they forget that gold won't behave the same way when it is currency and when it is not.

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There isn't and this is the mistake the 'gold goes up in deflation' crowd makes, they forget that gold won't behave the same way when it is currency and when it is not.

What happened to the price of gold denominated in JPY during their recent deflationary period? All that I can find is a 5 year chart.

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What happened to the price of gold denominated in JPY during their recent deflationary period? All that I can find is a 5 year chart.

The gold price is influenced by actors not just in Japan but all over the world.

I think the key factor influencing gold prices in Yen was the fall in the currency due to capital looking for better shores as recession became a permanent feature over there, the carry trade had an enormous impact and so did the BOJ I believe in trying to keep the Yen down to give its manufacturers an advantage over foreign competition.

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What happened to the price of gold denominated in JPY during their recent deflationary period? All that I can find is a 5 year chart.

well id say thats not alot of use, you need to find the price in JPY between 1989 & 1992 as that is the relevant hardcore deflationary period Japan to date

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More gold chasing less output. Yeah right pull the other one.

I think that it is a wealth preservation question rather than an income question.

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More gold chasing less output. Yeah right pull the other one.

Logically, this is my view, the only way it can appreciate is if the emotional premium is greater than the deflationary pressures but i cant see any reason why it would because in a hardcore deflationary environment the emotional premium should be in the bull market of currency as it becomes more valuable

Edited by Tamara De Lempicka

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Gold Mania will be good for Gold.

People realizing it is useless metal, with 0% yield will be bad for Gold.

I'd rather invest (unleveraged) in a house now than in Gold. Although Gold would be safer than a leveraged house probably.

Gold lease/repo rates are very similar to T-Bill yields.

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Logically, this is my view, the only way it can appreciate is if the emotional premium is greater than the deflationary pressures but i cant see any reason why it would because in a hardcore deflationary environment the emotional premium should be in the bull market of currency as it becomes more valuable

there is also default risk - which is hedged by physical gold. it is this risk that makes gold good value in deflationary times - as many deflationary times are accompanied by high risk of default on bonds etc...

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So if I buy a Krugerrand can I lease it to someone?

Because a lot of the hardcore goldsters would only buy the physical stuff.

Kruger Rands no. Good delivery bars yes. You do need some serious wedge in the game before you earn wholesale rates of return on your gold.

I am a gold holder for insurance. The insurance is worthless if it is not in physical form.

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