Gold prices and deflation
Friday, December 14, 2012
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Global growth has slowed quite dramatically since the onset of the Eurozone crisis, this has proved to have a deflationary impact on the markets.
Considering gold is considered the ultimate hedge against inflation many are asking if this means i am seeing the slow death of the gold bull market.
The World Gold Council believes that across all economic periods, whether inflationary or deflationary, gold has retained its purchasing power. Good news for gold bullion investment, but a report out this week suggests a deflationary period may be even more beneficial than an inflationary one.
Rhona O’Connell, citing Roy Jastram’s The Golden Constant writes that during deflationary periods gold’s value is at its most powerful:
In the United States there have been three recorded deflationary periods and gold increased its purchasing power in each of them, by between 44% (1929-1933) and 100% (1814-1830).
This suggests that to sell your gold investment ahead of deflationary events could prove counterproductive and leave with a high risk basket of investments due to the undermining of equities and low bond yields which is seen in such events.
Is it just about QE?
Such comments do not mean i should hope for and expect the central banks to allow us to descend into a period of deflation. They fear this more than the sky falling on their heads. But at the moment the markets are almost falling asleep waiting for further liquidity injections – they are clearly hungry for it. Even if central bankers are a little wary, we do expect to see easing of some form in the next few months.
In the short term we do seem to be facing deflation worries and a stagnant gold price. But in the long term it cannot be ignored that the markets have seen a huge injection of liquidity. Whilst the central banks may have created the money, they have little control after they press the button.
Gold shows up monetary inflation far better, quicker indicator than consumer prices. So whilst gold has doubled alongside the doubling of central bank assets, consumer prices have not.
Golden fundamentals
Whether i am heading for further QE or deflation, these aren’t the only factors which will drive the gold price.
The other factors which drive gold are very much still in place. The very same factors which am driving gold to record highs before the first round of QE was even thought of.
Interest rates remain historically low, with little indication of an increase. Whilst inflation may be officially low, real inflation rates indicate otherwise, showing savings in bank accounts are gradually being eroded away. Last month Bernanke and friends all committed to long-term low interest rates.
This week the World Gold Council reported that central bank purchases were at their highest in Q2 since 2009. Central banks are clearly losing faith in both the euro and the dollar, they are ahead of the game and setting up the barricades for when the full assault on the two currencies begin.
Whilst data from the US and the EU may appear to be slightly healthier than expected, fears remain about China, India and Brazil. The green shoots of the next financial growth phase seem to have withered, with many expecting China to be pushed to implement a round of stimulus. This in turn will increase gold demand from Chinese citizens terrified of inflation.
Whilst China and India may be a bit cool in gold purchases in the last quarter, demand from Europe, namely Germany has surprised everyone. I’m not sure why considering of all the currencies, the single currency union is the one which will create the biggest car crash of them all, affecting so many different economies and individuals. The Germans have seen a currency crisis before and they’re insuring themselves pronto.
As i have said repeatedly on these pages, in times of crisis, individuals turn to gold. Whilst Syria is not to be acknowledged for any decent behaviour at present, the population has displayed the human tendency to turn to gold in times of crisis. This week Bloomberg reported President Assad had lifted restrictions on gold bullion imports, this comes at a time when it is becoming increasingly difficult for the country to interact with the outside world.
Short term, long term gold price :
The mainstream seems to think that economics and the gold price mirror one another like Tweedledum and Tweedledee. Unfortunately like life, it doesn’t work like this. It takes time for one another to catch up. Hence the ‘great correction’ i am witnessing, investors, the markets and inflation all need to look across the race lanes and see where everyone is.
Inflation, deflation, who knows, we need to step back, discard our magnifying glasses examining the brush strokes and look at the dark picture in front of us. Lots of things are going on, but they all play a role in the story; the economy is going to the dogs and gold has plenty further to run.
Global growth has slowed quite dramatically since the onset of the Eurozone crisis, this has proved to have a deflationary impact on the markets.
Considering gold is considered the ultimate hedge against inflation many are asking if this means i am seeing the slow death of the gold bull market.
The World Gold Council believes that across all economic periods, whether inflationary or deflationary, gold has retained its purchasing power. Good news for gold bullion investment, but a report out this week suggests a deflationary period may be even more beneficial than an inflationary one.
Rhona O’Connell, citing Roy Jastram’s The Golden Constant writes that during deflationary periods gold’s value is at its most powerful:
In the United States there have been three recorded deflationary periods and gold increased its purchasing power in each of them, by between 44% (1929-1933) and 100% (1814-1830).
This suggests that to sell your gold investment ahead of deflationary events could prove counterproductive and leave with a high risk basket of investments due to the undermining of equities and low bond yields which is seen in such events.
Is it just about QE?
Such comments do not mean i should hope for and expect the central banks to allow us to descend into a period of deflation. They fear this more than the sky falling on their heads. But at the moment the markets are almost falling asleep waiting for further liquidity injections – they are clearly hungry for it. Even if central bankers are a little wary, we do expect to see easing of some form in the next few months.
In the short term we do seem to be facing deflation worries and a stagnant gold price. But in the long term it cannot be ignored that the markets have seen a huge injection of liquidity. Whilst the central banks may have created the money, they have little control after they press the button.
Gold shows up monetary inflation far better, quicker indicator than consumer prices. So whilst gold has doubled alongside the doubling of central bank assets, consumer prices have not.
Golden fundamentals
Whether i am heading for further QE or deflation, these aren’t the only factors which will drive the gold price.
The other factors which drive gold are very much still in place. The very same factors which am driving gold to record highs before the first round of QE was even thought of.
Interest rates remain historically low, with little indication of an increase. Whilst inflation may be officially low, real inflation rates indicate otherwise, showing savings in bank accounts are gradually being eroded away. Last month Bernanke and friends all committed to long-term low interest rates.
This week the World Gold Council reported that central bank purchases were at their highest in Q2 since 2009. Central banks are clearly losing faith in both the euro and the dollar, they are ahead of the game and setting up the barricades for when the full assault on the two currencies begin.
Whilst data from the US and the EU may appear to be slightly healthier than expected, fears remain about China, India and Brazil. The green shoots of the next financial growth phase seem to have withered, with many expecting China to be pushed to implement a round of stimulus. This in turn will increase gold demand from Chinese citizens terrified of inflation.
Whilst China and India may be a bit cool in gold purchases in the last quarter, demand from Europe, namely Germany has surprised everyone. I’m not sure why considering of all the currencies, the single currency union is the one which will create the biggest car crash of them all, affecting so many different economies and individuals. The Germans have seen a currency crisis before and they’re insuring themselves pronto.
As i have said repeatedly on these pages, in times of crisis, individuals turn to gold. Whilst Syria is not to be acknowledged for any decent behaviour at present, the population has displayed the human tendency to turn to gold in times of crisis. This week Bloomberg reported President Assad had lifted restrictions on gold bullion imports, this comes at a time when it is becoming increasingly difficult for the country to interact with the outside world.
Short term, long term gold price :
The mainstream seems to think that economics and the gold price mirror one another like Tweedledum and Tweedledee. Unfortunately like life, it doesn’t work like this. It takes time for one another to catch up. Hence the ‘great correction’ i am witnessing, investors, the markets and inflation all need to look across the race lanes and see where everyone is.
Inflation, deflation, who knows, we need to step back, discard our magnifying glasses examining the brush strokes and look at the dark picture in front of us. Lots of things are going on, but they all play a role in the story; the economy is going to the dogs and gold has plenty further to run.
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Forex And Commodities
