Thursday, June 24, 2010

Gold During Deflation: Not That Bad If Mild

An Erste Bank report, excerpted by Mineweb, has a graph that breaks monthly CPI increases into deciles. The lowest decile's average is a slight fall in the CPI - and corresponding gold performance is a slight gain. The only decile whose periods correspond to a fall in gold, overall, is the third lowest.

A study of deflationary periods shows that gold performs better once deflation is replaced by reflation, which is happening now. The report forecasts gold going to its CPI-adjusted high of 1980, which would amount to $2,300.

[The full report, in PDF form, is here, courtesy of Zero Hedge. Thanks to an anonymous commenter for the link.]

It's an interesting finding. That third decile, in which the monthly CPI increases by about 0.2% on average, is largely composed of disinflationary periods. Disinflation is hellish for gold.


  1. Daniel,

    I saw an article recently where it was said that Gold was a Deflation Hedge and as proof the author showed a chart from the period 1929 to 1935 where gold spiked from $20/Oz to $35/Oz.

    The author insisted that this demonstrated that Gold was a deflation hedge and, since the graph was from a report published by JPMorgan, I guess the author thought that somehow this gave the graph and the conclusion credibility. Unflrtunately, the author did not do his homework. The reason that we had a deflationary environment from 1929 to 1935 was because we were on a Gold Standard w/ very strict fractional reserve requirements. Thus, deflation could take place in such an environment. Plus, the fact that Gold rose from $20 to $35/Oz was because Franklin Roosevelt confiscated most all Gold via the "Trading with the Enemies Act" and then raised it's price from $20/Oz to $35/Oz (

    So...actually what Gold did (should one have decided to keep the allowed 10 Ounces in possession) was act as inflation hedge in this period because even though we were on a Fiat Currency standard internally within the US, we were still on a Gold-exchange standard with all other countries, and when Gold was valued from $20 -to- $35/Oz our currency dropped accordingly in value against other currencies.


  2. Daniel,

    BTW, in the article you referenced, did you take note of the last chart of that article, entitled, "oil vs Gold, Inflation Adjusted"? (

    I have about the same chart except I did not adjust it for inflation. However, it gets a stronger message across because it shows that the prices of Oil and Gold show a tremendous correlation. I think it's about the most valuable chart I have ever made. I would love to share this chart with you, but I don't have an email address for you. I assume you have my email address.



  3. Thanks for your comments, John. Your own E-mail address isn't available, as your profile isn't public. My own is .