In all matters such as these, studying the past can be beneficial, but — as you have read so many times before — knowing the past is not a guarantee of future results. Central banks want anything but that. It just creates enormously bullish outcomes on the probability curve for the precious metals. Gold is neither a perfect inflation nor deflation hedge. Gary North states, “There are a few contrarians who think that deflation is coming: both monetary deflation and price deflation. It was initially related to financial crisis of 2007-2008, but quickly transformed into a downturn in real activity and later into the European sovereign debt crisis. Gold is the only money that is real and has no counterparty risk, contrary to paper currencies based on debt. In connection with this underlying cause, you can also hear terms such as wage inflation and cost inflation. The debt-to-GDP ratio is down from its peak in 2009, much as it receded slightly in the late 1920s when a financial boom temporarily juiced the economy. Central banks want anything but that. A recession now means a vicious debt deflation: a collapse in new lending, refusals to roll over debt, an inability of borrowers to pay higher rates, soaring bankruptcies and much higher unemployment. Investments, Gold & Silver The deflation and depression is right here, right now, and if you don't believe that, try asking some of the 30 million people who just lost their jobs in the U.S., or those who (used to) work in the catering and tourism industries. You should be… The question again for you is… In a period of global deflation investors and the public increase their demand for gold as a hedge against paper currency debasement, a hedge against financial counterparty failure and the rising risk of private and public sector default. Since then both gold has made a new nominal high and silver got very close to its old nominal high of $50.00 It is neither a commercial commodity, nor a title to any such commodity, so it is irredeemable paper money without any intrinsic value. Gold is often classified as a commodity; however, it behaves more like a currency. Sign up today. The yellow metal is a safe-haven asset which may shine (or languish) during both inflationary and deflationary periods. The return to gold having been agreed is attributed to a decline in prices between 1819 and 1821. Debt, Deflation, The Dollar & Gold. Tools for Effective Gold & Silver We have already has the financial “crisis” of 2008 and even the mainstream refers to the massive sell-off as a crisis. When deflation is accompanied by significant economic worries and a loss of confidence in the U.S. dollar, gold should shine. Chart 1: The U.S. CPI inflation rate (green line) and the Japan’s CPI inflation rate (red line) between 1914 (1961) and 2017. With deflation, debt gets more expensive over time, taking a bigger and bigger bite out of your real income. And third, with gold having fallen from a 30% premium to paper to only 3%, it appeared eminently possible, if gradually done. The real yield is calculated by subtracting the 10-year Treasury Inflation Protected Security breakeven rate (the measurement of consumer price inflation expectations) from the nominal 10-year Treasury yield. Debtor economies which are in desperate need of U.S. dollars, just had their energy costs cut in half, making it far easier for real people to get to work, buy food, pay off debt and build a life for themselves. A stronger dollar also typically means weaker gold prices. There is a common view in financial markets that credit deflation is bad for gold prices, because gold nowadays is … Contrary to commodity money, which is money that is at the same time a commercial commodity, fiat money is a legal claim, which derives all its properties from the law. Right now the financial marketplace is so unstable that it is difficult to put too much faith in anyone’s opinion based upon such a short snapshot. link http://www.zealllc.com/2003/infdef2.htm it s a bit dangerous to think that one will be able to time exactly when to make the move from dollars to physical gold. link http://silverstockreport.com/2008/auction-3-update-5.html an important deflationary event in the U.S. financial markets. ... was the government taking industry’s fresh debt and giving them money to go build. It may be considered negative inflation, i.e. For example, fixed rate bonds are a poor hedge against inflation. In addition, the ratio of public debt to gross domestic product (GDP) ... "Good Versus Bad Deflation: Lessons from the Gold Standard Era," Pages 1-2. It was thought to be impossible. However, gold is not just about inflation versus deflation. (already happening). A great way to start is to sign up for our gold newsletter today. Of course, many of my readers are equally if not more interested in what happens to silver in a deflation as well. Since 1995, news.GoldSeek.com publishes the leading gold news commentaries, gold market updates and reports providing gold investors with the most updated gold and silver prices, news & precious metals information! Central banks want anything but that. It took place during the 1930s, began with the U.S. stock market crash of 1929 and ended after World War II. Debt, Speculation, and Debt Deflation The Bottom Line Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. Under a regime of debt money a deflation means a collapse (implosion) of debt. However, few understand that gold is also a hedge against deflation. That is, it’s become a real drag on the global economies. A typical effect of deflation is an increase in the purchasing power of cash. That’s a 40% increase in seven years. Gold is a global monetary asset and its price reflects the global sentiment, however, it is mostly influenced by the U.S. macroeconomic conditions. Deflation is the market call of the establishment. A recession now means a vicious debt deflation: a collapse in new lending, refusals to roll over debt, an inability of borrowers to pay higher rates, soaring bankruptcies and much higher unemployment. What was the easiest way to make a small fortune during the Great Recession? Personally, I like to let the market speak, and for many years I have forecast that a day would come when the price of the physical gold and silver market would separate from the price “set” in New York or London. Hence, a safe-haven asset is expected to retain its value or even increase in value during times of market turbulence when most asset prices decline. In the preface, I stated that the results "seem largely new," I spoke thus cautiously because of my unfamiliarity with the vast Alas, this is the case when looking at the retail market versus the commercial market. Let us venture in the past when it looked like deflation was going to reign at the bottom of the financial crisis in late 2008. According to the National Bureau of Economic Research, which officially declares the peaks and troughs, the recession in the U.S. began in December 2007 and ended in June 2009, but in other countries the scale and timing of the recession varied. Discover what market correlations are, and how you can use them to your advantage. We don’t mean the sinking of Titanic but the sinking economy of the 1970s. THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS BY IRVING FISHER INTRODUCTORY IN Booms and Depressions, I have developed, theoretically and sta-tistically, what may be called a debt-deflation theory of great depres-sions. Further assume that the Dollar price of gold at the end of the year is $1180. All rights reserved. The Great Depression was the longest and most severe economic depression ever experienced by the global economy. The real yield is inverted so the graph shows that when the real yield is declining, the gold price is going up, and vice versa. "Assume gold is $1200 at the start of a year and there is 5% deflation that year. We’re at the Silver Bull Market’s Most Powerful Leg, Once in a Lifetime Profits by Investing in Silver with David Morgan, To Print, or Not To Print, That Is The Question, Investors Should Take Heed of the Inflation Chatter, Quantitative Easing Our Way to Currency Destruction, Silver Bull Market Will Crush Gold As Financial System Collapses, http://silverstockreport.com/2008/auction-3-update-5.html, http://www.silver-investor.com/davidmorgancommentary/articles/8-21-08_ibtimes26_SilverArbitrage.html, http://www.financialsensearchive.com/fsu/editorials/2004/0420.html, http://www.lewrockwell.com/north/north436.html. In other words, under the monetary system that was in effect during the 1930s gold was a hedge against deflation. Deflation In simple terms, inflation (rising prices) is a phenomenon when the supply of … Terms of Use and since, Bitcoin share the same properties as the yellow metal, he is confident that this digital gold will also rally because of debt deflation fears. While home price deflation is still ripping, and headline consumer price indexes are showing mild deflation, it appears the debt-deflation risk is being contained by extreme fiscal and monetary measures. Several years ago my entire presentation in The Morgan Report was on the topic of silver and gold during a deflation. I think this is the way to look at the situation. It drives down the cost of imported goods in the United States. Unlike any other financial assets, gold and silver are not backed by debt. link http://www.elliottwave.com/deflation/ Previous gold bull markets ended when this ratio crossed over the 4.8 level. Deflation and Gold There is a common view that deflation is bad for gold. See article here. Credit Deflation and Gold. An inflation hedge is an investment that maintains or increases its value over time. Hence, an inflation hedge should provide protection against the depreciation of the currency. He said eventually, central banks will try to "inflate away the debts accumulated" by their governments, which will boost gold prices. One of my favorites is from Dan Ascani, who wrote essentially about Professor Jastram’s very long-term study on gold, and he essentially states that Jastram studied four pronounced price deflations taking place. This was followed in 1933 by a paper in Econometrica, titled The Debt-Deflation Theory of Great Depressions. Every measure of growth is grim. ... Debt, Deflation, The Dollar & Gold By: … Further, Bob goes on and states that neither gold nor silver will do well in the deflation he had predicted for so long. When one sees that just by holding gold for 13 years, from 1920 to 1933 operational wealth would have increased 2½ times, one realizes that gold can be a valuable hedge in deflation — however, a poor one in inflation. Chart 2: Price of gold (yellow line, left axis, London P.M. Doug Casey has repeated often that the metals, and particularly gold, are a CRISIS HEDGE. It was the largest economic downturn since the Great Depression. As one can see in the chart below, the stock market declined from October 2007 to March 2008, while the price of gold continued to rally. In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief from rising real debt burdens through higher prices. The Golden Constant which looked at gold during both inflations and deflations, and Silver the Restless Metal which was a similar study for silver. Has all the stimulus and government/political interventions worked or not? A safe-haven asset is an asset that is uncorrelated (weak safe-haven) or negatively correlated (strong safe haven) with another asset or portfolio in times of market stress or turmoil. On the other hand, most ‘hard assets’ are believed to be excellent inflation hedges. Accessed June 18, 2020. What we can take from this past history is that those that were savvy enough to see an opportunity and took advantage of it. It is true that when Lehman Brothers went bankrupt, the price of gold declined together with equities, since cash was king at that time. Copyright © 2019 The Morgan Report. A recession now means a vicious debt deflation: a collapse in new lending, refusals to roll over debt, an inability of borrowers to pay higher rates, soaring bankruptcies and much higher unemployment. Is This The Second Silver Lining the World’s Been Waiting For? Adam Hamilton of Zeal LLC wrote, “Anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. It was believed that it could not happen. Be thoughtful in your answer your financial future may well rest upon your action or inaction. He pointed out that gold prices have confused traders and asset allocators. Start off with a large one. During deflation, everything becomes cheaper (including real-estate, gold, silver, stocks) and cash increase in value, because with the same amount of cash you can buy more over time. This kind of deflation is often a result of long periods of artificial expansion of fiat money and its impact on the economy is subject to debate. Well, if they do, and they probably will because you know they don't want a debt deflation. Today’s debt bubble, as a percentage of GDP, is far greater than the bubble whose deflation coincided with the Great Depression. Looking at the Opinions With the USD outperforming fiat currencies and commodities—the WTI Oil futures prices just sunk to negative prices, gold will stand as a main beneficiary as a safe haven asset. Castrese Tipaldi wrote on SafeHaven.com, “I don’t know if in the last week we saw the last gasp of those usual subjects trying to cap gold, and I don’t know if we now have the very last possibility to get silver at a price so cheap.” What makes this quote so interesting to me is he wrote this on April 20, 2004. So, a safe-haven asset protects investors during crises, but not necessarily during normal times. Section 2.2 briefly recapitu-lates the basic case against the interwar gold standard, showing it to have been a source of deflation and depression, and provides some new evidence con-sistent with this view. Furthermore, under such a system the purchasing power of gold would decrease during periods of inflation; that is, when the dollar was defined in terms of gold, it would have made sense to shift investment away from gold during periods of inflation.” link http://www.financialsensearchive.com/fsu/editorials/2004/0420.html Steve Saville of the Speculative Investor writes, “The most important difference between then (the 1930s) and now is that gold and cash US Dollars were interchangeable during the early 1930s (the deflationary period) by virtue of the fact that the Dollar was defined as a fixed weight of gold. There is a common view that deflation is bad for gold. After all, gold loves inflation and tends to be negatively correlated to the USD. Since that time, gold has been used as an investment. As far as I know, there are only about a dozen of them who write newsletters or run websites. Fiat money is a currency that a government has declared to be legal tender, but is not backed by a physical commodity. link http://www.silver-investor.com/davidmorgancommentary/articles/8-21-08_ibtimes26_SilverArbitrage.html Deflation Hedge: Gold & silver's profitable performance under so many past deflations strongly argues that they will perform well in future deflations. Investments. In all four deflations, operational wealth in the form of gold appreciated handsomely. Readers might recall I wrote an article titled Silver Arbitrage, back in August. Bob Prechter has written much on the topic; his overview of defining Inflation and Deflation can be found here. However, in the near term, he expects deflation to weigh on gold prices. While you might think that deflation is good because cash increase in value and you can get more, in … However, gold found a bottom and began to rally a few months earlier than the U.S. stock market. But it occurred anyway. with details not availableto 99% investors, I've read and agree to the Yet, from its March 17 record peak, GOLD prices have plummeted more than 20%.” Gold is used as the standard because of its durability, rarity, and universal acceptance. At that time,  Jason Hommel of Silver Stock Report stated: These cases are presented in the chart below. A typical effect of deflation is an increase in the purchasing power of cash. Privacy Policy*. Again going back into the distant past we might glean something … The increase in money supply causes price inflation, while the decrease in money supply leads to price deflation. If one invest in a bond that gives a 3 percent return, but inflation rate is 5 percent, they are actually losing their purchasing power. And we saw that developing, we saw the way the currencies were acting, that gold had broken away from the dollar, gold was rallying with the dollar. The price manipulation at the COMEX has been so  severe in the past, that it has created a profit incentive to create a free market in silver, through an arbitrage between the physical silver market and the paper price as set by the Comex a profit opportunity exists by buying in one, and selling to the other.” David Morgan. Such deflation is obviously positive for the economy. Inflation vs. National money including bank deposits and bank notes is convertible to gold at a fixed price. [ii] It would require a deflation of paper notes relative to gold to get the old standard to stick. Let’s analyze the Great Recession, i.e. link http://www.ameinfo.com/134334.html it occurs when the inflation rate falls below zero. explicitly consider, leaving open the possibility that debt deflation was impor-tant. Those who have saved in real assets, like gold, just saw their wealth double in real terms over the past few days. The world’s most recognized stock index — the Dow Jones Industrial Average — is down 30% from its October 2007 all-time high. Currently it seems the physical markets are taking control, yet the clues are still subtle, nonetheless with Hugo Chavez asking for Venezuela’s gold to be returned we must ask is this the tipping point in the physical gold market that is the start of a trend? Are Gold & the S&P 500 Behaving Logically or Irrationally? The rest of the paper is organized as follows. However, the decline in the general price level may be also a result of genuine economic growth and higher productivity. The Great Recession is the period of global economic decline during the late 2000s. Copyright © 2020 by Sunshine Profits The increase in the prices of goods caused by the increases in the money supply. The monetary base roughly matches the size of the Federal Reserve balance sheet, which indicates the level of new money creation required to prevent debt deflation. The former looks at the wage component as an inflationary driver, while In fact this writer is fond of quoting Professor Jastram in both of his books. Central banks want anything but that. The fact that gold and cash were officially linked during the 1930s meant the deflation caused the purchasing power of gold to increase along with the purchasing power of cash. This was precisely the price deflation which occurred when the gold standard was in place. For some reason, most of the deflationists seem to think that gold’s price will rise in a mass deflation. This writer bought commercial bars and later sent those bars to a mint to have the bulk silver converted into silver rounds. It's free and if you don't like it, you can easily unsubscribe. Its price also depends on the market sentiment and risk aversion. We mean stagflation – something that was excluded in Keynes’s model, but it happened nevertheless, changing the global economy and the economics forever. Gold had served as money for thousands of years until 1971 when the gold standard was abandoned for a fiat currency system. So the less debt you have going into a … “ The Debt-Deflation Theory of Great Depressions ” (Fisher 1933, p. 344) Fisher’s Paradox was ignored by mainstream economics, because they subscribe to the fantasy model of banking known as “Loanable Funds”, in which banks are simply intermediaries between savers and borrowers. Specifically, “I’ll cut right to the chase: Unless you’re about 80 years old, the United States economy is undergoing the worst downturn in living memory. As rapid growth in the supply of goods outpaced the gradual growth in the money supply, there was a mild deflationary trend in the 19th century. However, gold is not just about inflation versus deflation. Did you enjoy the article? We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes.” See entire article here. The shiny metal is considered an inflation hedge, not a deflation hedge. Some insist that both metals will do well under almost any economic conditions; some, like Bob Prechter, think neither gold nor silver will do well; and others, believe gold and gold alone will be the only thing left standing. The term derives from the Latin fiat (“it shall be” or “let it be done”) as fiat money did not spontaneously emerge in the free market, but it was established by government regulation or law. you end a debt deflation by a #gold revaluation — Fabrice Drouin Ristori (@FabriceDrouin) March 28, 2020 what s the point of holding dollars (paper) if you can t buy physical gold ? The yellow metal is very weakly correlated with other commodities and is less used in the industry. Dr. Marc Faber one of the most respected and best followed in the industry has stated his opinion on the deflation debate as follows–“Therefore, under both scenarios — stagflation or deflationary recession — gold, gold equities, and other precious metals should continue to perform better than financial assets.” See article here. The shiny metal is considered an inflation hedge, not a deflation hedge. It generates deflation. Theorising Debt Deflation where excessive debt leads to deflation first as the debt is so huge it cannot be repaid leading to bankruptcies and so forth. You can read many varying views on what will happen to gold and/or silver under a deflation. Our read always has been that the wave of debt-deflation dynamics building last year would provoke a massive policy response. The views on this topic vary. Fix) and S&P 500 Index (red line, right axis) from January 2007 to December 2010. It's like a deflationary wrecking ball and it creates more of that debt deflation dynamic that we so fear.” So that might have traditional gold buyers nervous. The fact that gold and cash were officially linked during the 1930s meant the deflation caused the purchasing power of gold to increase along with the purchasing power of cash. Deflation is the opposite of inflation, so it is a decrease in prices. The quantity of money is probably the most important concept in economic theory, since it affects the price level. Unlike national currencies, the yellow metal is not tied to any particular country. link http://www.lewrockwell.com/north/north436.html Confused? Do you need Gold and Silver For Retirement. The deflation of wages and the rising cost of living has seen the rise of debt funded maintenance of living standard rise since, you guessed it again, 1971 when we left the gold standard and started this epic debt cycle. The biggest problem is debt and we believe it’s passed the tipping point. A recession now means a vicious debt deflation: a collapse in new lending, refusals to roll over debt, an inability of borrowers to pay higher rates, soaring bankruptcies and much higher unemployment. So much has happened since Bear Sterns and Lehman Brothers that it might take volumes to go into it all, let’s simply request that you ask yourself if the financial conditions has gotten better or worse since then? Gold standard is a monetary system wherein the value of domestic currencies is fixed to a certain amount of gold. Most analyses have focused on gold’s outperformance during periods of … Silver actually traded below $9.00 for a brief time. These hard assets are oil, farmland or gold. When it is used as part of the hard-money system, it reduces the volatility of currencies. As inflation is mainly caused by the increase in the money supply, deflation is primarily a result of the decrease in the money supply. The money supply is the total amount of money available in an economy at a particular point in time. They do not warn their subscribers, ‘Don’t buy gold or silver!’ If they did, they would have fewer subscribers.” See entire article here. However, prices may fall due to hoarding of cash or bank credit deflation, which occurred during the Great Depression when there was a significant contraction in credit and money supply. “If ever there was a time for the ‘Safe-Haven’ lure of precious metals to surface — now, yesterday, even seven months ago when the Bear Stearns’ bailout launched the historic reshaping of Wall Street — would have been it. the latter posits that inflation relates to the increased cost side. In 2014, it had soared to $199. Two most known periods of deflation are the Great Depression in the U.S. and the Japanese deflation which started in the 1990s. In 2007, for instance, world debt was $142 trillion. Share it with the others! Conversely, anything not typically ‘paid for’ with debt, including groceries and general living expenses, is almost certain to rise in the coming years. We encourage you to learn more about the gold market – not only to investigate its performance during deflationary periods, but also to check out other gold investment ideas. Abandoned for a brief time value over time, taking a bigger bigger.: price of gold at the wage component as an inflationary driver, while the latter posits that relates. During normal times gold should shine gold is also a hedge against deflation debt deflation gold economy at a particular point time. Often classified as a commodity ; however, gold is often classified as a crisis hedge cost.. 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