Performance of gold & silver in deflation

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switters's picture
switters
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Performance of gold & silver in deflation

I'm curious to know how you all think gold and silver will perform if we continue to have significant deflation for the next several years.  Gold performed well during the Depression years but at that point the dollar was still tied to gold.  Some argue that gold and silver will get slammed along with all commodities during deflation, others argue that they play a dual role as both commodity and money and thus they will perform better than pure commodities. 

However, gold's price has inversely tracked the dollar recently and people like Mish and Kevin Depew are arguing that the dollar is likely to stay strong if deflation continues simply because the rest of the world is as bad off (or worse) as the US:

Quote:
Additionally, in order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both, stronger than the weakest.S. economic downturn, and larger in size that the state of Ohio's or even California's economy.

Ironically, while smaller emerging markets could potentially find themselves facing a Zimbabwe-esque hyperinflation, that would only make the U.S. dollar and U.S. debt more attractive and secure. Emerging markets are at this point the only place where it seems a possibility that credit could find a willing home and debt an eager taker, but even that is not a certainty. It is more likely that the creeping protectionism that is developing, as countries begin to wake up to the fact that the global system is too big to save, results in a more severe credit contraction globally.

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If the dollar stays strong and deflation persists, it seems unlikely that gold and silver will perform well.  I am aware that it's very possible that the dollar will crash and inflation will occur in one or two years time, but in this post I am mainly interested in hearing your opinion on how gold and silver would perform in an extended period of deflation with no gold standard.

dcary's picture
dcary
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Re: Performance of gold & silver in deflation
I have the same concern...but it is interesting that physical silver and gold continue to have very high premiums and it is only the ETFs that I hold that are doing poorly.
switters's picture
switters
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Re: Performance of gold & silver in deflation

An interesting article on Reuters:

Gold to Outperform Oil as Recession Booms

The price of gold has not fallen as sharply as the price of crude oil and other cyclical commodities during the global financial crisis, and bullion should strengthen relative to other commodities as economic troubles deepen.

 

Ray Hewitt's picture
Ray Hewitt
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Posts: 458
Re: Performance of gold & silver in deflation

Personally I don't worry about it. I've been buying silver from four years ago to only recently. If I was to sell, I would certainly lose. But I don't plan to sell. I bought because the dollar is on a long term trend towards worthlessness. I have no money in real estate or financial assets which are doing much worse. There has been much talk on other sites about the price manipulation on COMEX, keeping the paper prices artificially low. In the physical market, demand is high and supply is short. I don't think the dichotomy can remain much longer, some estimate a short squeeze in December. Whatever, I don't care about the short term. The early bird gets the gold.

switters's picture
switters
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Re: Performance of gold & silver in deflation

I have physical gold and silver and I'm not planning on selling anytime soon.  I'd be nuts to do that.  So mostly this is just an intellectual curiosity and an attempt to better understand how gold and silver are currently perceived in the marketplace, how that perception affects their price movements and whether that perception is likely to change as the global economic depression deepens.

I agree that the dollar will crash eventually, and when that happens it's very likely that the price of both gold and silver will rise  dramatically.  I'm just curious about what might happen between now and then.  There's a lot of disagreement about that in the blogosphere.  You've got people like Mish and Kevin Depew predicting a long period of deflation, and others (like Peter Schiff, James Turk, all of the gold/silver bugs and maybe Chris M?) predicting an imminent dollar collapse and switch to inflation in six months to a year.

 

 

 

Ray Hewitt's picture
Ray Hewitt
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Posts: 458
Re: Performance of gold & silver in deflation
I'm just curious about what might happen between now and then
I take a wait and see attitude. It's guesswork at this time when the deflation will exhaust itself and inflation take over. It hinges on the Treasury Bond market and the fate of the dollar. When that happens, they'll bring it to our attention long before it hits the mainstream media. Meanwhile, I'm taking full advantage of this deflation to extinguish my remaining debts. Investment Rarities published some good insights. See Bill Buckler, Commentary of the Month and Steve Saville
john50's picture
john50
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Joined: Sep 2 2008
Posts: 74
Re: Performance of gold & silver in deflation

I have some historic bullion and commodity charts here for commodity traders.

http://vault.bz/gold/  - look for the one that shows silver during the 1930's.

Gold is just breaking down into a move lower according to my charts, I am looking for a near bottom around $600-650 in gold, followed my a corrective 'B' wave, then another lower low in 2009. Oil is also taking one more move lower in line with a move for dollar strength. 

pinecarr's picture
pinecarr
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Re: Performance of gold & silver in deflation
switters and hewittr, thanks for the good links.
calgapa's picture
calgapa
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Re: Performance of gold & silver in deflation
Why do you think there is going to be deflation?.  With all this money being printed by the central banks there is a high probability of inflation.
switters's picture
switters
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Joined: Jul 19 2008
Posts: 744
Re: Performance of gold & silver in deflation
There is also a huge deleveraging going on in credit and housing and at the moment the effects of that unwinding are surpassing all of the monetary inflation efforts.  There are several very astute analysts like Mike Shedlock who thing we're headed for a significant period of deflation before inflation wins out again.  The question is how long will deflation last, and how bad will it be, before the heroic money creation efforts of the Fed start working?

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