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.
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3 comments:

  1. UnknownJune 24, 2010 at 5:07 PM

    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.

    http://www.businessinsider.com/jpmorgan-explains-why-gold-is-a-great-bet-during-deflation-2010-6

    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 (http://en.wikipedia.org/wiki/Executive_Order_6102)


    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.

    Thanks.

    ReplyDelete
  2. UnknownJune 24, 2010 at 5:20 PM

    Daniel,

    BTW, in the article you referenced, did you take note of the last chart of that article, entitled, "oil vs Gold, Inflation Adjusted"? (http://www.mineweb.co.za/mineweb/media_stream/mineweb/1/106795/images/100623%20stoeferle%204.JPG)

    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.

    thanks.

    John

    ReplyDelete
  3. Daniel M. RyanJune 25, 2010 at 11:54 AM

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

    ReplyDelete

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