Wednesday, July 21, 2010

Jeffrey Christian On Gold During Deflation

In an interview with Hard Assets Investor, rewebbed by Bullion Vault, Jeffrey Christian explains that gold tends to do well in a deflation because of a ramp-up in investment demand. He points out that gold did go up in deflations past, not just the one that ended with the Roosevelt devaluation.
Jeffrey Christian: Well, it's hard to say that it's true, because we've had very few real deflations in history, in recent history. The big deflation that we had coincided with the Great Depression. And gold came into the Depression on a fixed price. And there was so much investor demand for gold that the governments had to abandon the Gold Standards that existed in the late Twenties, early Thirties, and allow gold to float, at which point Gold Prices basically appreciated 60%.

A lot of people think that Roosevelt raised the price 60%, but he didn't. What he did is he kept raising the price until he found a market clearing price. So, he was really letting the market set the price for gold. And he had to keep raising the price until it got up to $33 before people would say, "OK, now I'll give you my gold."...

And then if you take that deflation out, and you go back and you say, "What about other deflations?" we saw three bouts of deflation in the 1870s, 1880s and 1890s. And in each case, you saw a tremendous Gold Investment demand. So, it's not that gold makes particular sense during an inflation, but what you see in deflation is so destructive of economic sensibilities and systems that people flock to gold as a safe haven. They say, you know, "This could bring down the whole house of cards."
Christian makes the point that gold is much higher than it would be if conventional commodity supply-and-demand fundamentals prevailed, but they don't because of investment demand. Should that source of demand fade away, gold would come down a lot. He doesn't expect it to do so in the foreseeable future.

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