Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Outperforms the U.S. Dollar During Deflation

Commodities / Gold & Silver 2009 Jul 05, 2009 - 07:15 AM GMT

By: Adam_Brochert

Commodities

Best Financial Markets Analysis ArticleKarl Denninger over at Market Ticker just came out with his 2009 prediction review bashing Gold and Robert Prechter has considered the entire run in Gold since 2000 some kind of weird Elliott Wave correction despite a 300% advance from the early 2000s. Deflation and Gold are not incompatible and it seems odd to me that such seasoned commentators are blind to it. I respect both of these gentlemen and their opinions but I disagree with their views on Gold.


Don’t get me wrong, I’m currently in the deflationist camp. I’m not calling for the collapse of the US Dollar. But I think both of these gentlemen and others in the deflation camp who seem to despise Gold and call for its price collapse would be reasonable enough to look at the actual data. And no, I’m not talking about the 1930s because I know we were on a Gold standard then and now it’s different.

If Gold is not a safe haven, then pray tell me what is? If you say the U.S. Dollar, how about we look at some inconvenient facts that prove Gold is doing better than the U.S. Dollar during an actual fiat deflation? The current debt deflation bear market began 10/11/2007. If you bought Gold and the US Dollar at the closing price on 10/11/2007, here are your real, actual returns since this bear market began:



So, why again isn’t Gold a safe haven in a deflation? Yeah, sure, you can call for a pending collapse in the Gold price any day now and call for a stunning rise in the U.S. Dollar index any day now. But you need to admit when you’re wrong and so far many deflationists have been absolutely and entirely wrong about Gold. Are there any deflationists out there who would like to dispute the actual facts? In the end, aren’t the facts more important than what someone believes should happen?

By the way, as far as Denninger’s prediction for 2009 on the scoreboard so far, Gold closed on 12-31-2008 at 884.30/ounce and now is at 929.50 (a 5% gain – pretty good 6 month return for a safe haven, eh Karl?). The US Dollar Index closed at 81.21 on 12-31-2008 and is now at 80.26 (a small loss negated by a 1-2% yield over the past 6 months). So, Gold has been a more profitable safe haven than the US Dollar in the middle of a deflationary storm.

Gold is money. I don’t agree with the hyperinflationist crowd for this cycle (we just finished a hyperinflation in asset prices!), but it is naïve and shows an ignorance of history to assume that nothing could cause a one-off event to devalue the US Dollar literally overnight by 20-70%. This would wipe out the entire “safety” concept of the US Dollar and make that 3% yield seem a little foolish to chase, no?

Now, I understand that some people are traders and I understand that you can’t eat Gold. I am not calling for the end of the world, I am not calling for the US Dollar to become completely worthless, I like shorting the markets when it is profitable to do so and I am a believer in deflation. But if cash is king during deflation, then Gold is the emperor and king of kings.

It’s time for deflationists to stop their antagonism towards Gold and recognize Gold for what it is - money, not a commodity. I understand the aggravation deflationists experience when trying to argue with hyperinflationist Gold bugs, but that doesn’t mean such deflationist commentators should steer people towards the wrong investment. In a global fiat system with no apparent anchor, it is foolish to assume that those seeking safety around the world will as a rule prefer the US Dollar to Gold given global sentiment towards the US. It’s Gold-dispensing ATMs that are now popping up in Europe, not US Dollar-dispensing ATMs.

The US Dollar can rise and Gold can rise – these concepts are not incompatible to those who understand that Gold is an independent international currency with no debt or other political promises attached to it. There is a limited amount of physical Gold in the world versus a seemingly endless barrage of fiat promises despite their relative decrease due to deflation/credit contraction. As a believer in Exter's liquidity pyramid concept during deflation, I believe even a small further global move into physical Gold will cause its price to remain firm and likely rise further during this deflationary depression.

Prechter has been calling for people to be in T-Bills and bank CDs since the 2000 stock market top. That protected people from wicked stock market declines. But before we praise him for all his amazing calls (and some of them were), let’s look at a strategy of holding Gold instead of his call to hold cash, using the closing price on 12/31/1999 and the current price levels of Gold and the US Dollar Index:



Now, I have ignored yield and returns on the US Dollar, but I didn’t want to be presumptuous and pick a yield that would be considered unfair. I would rather hear from one of the Gold-hating deflationists to put in the correct yield on cash and tell me what the appropriate return on cash is since the start of 2000. No matter how you slice it, it falls way short of Gold.

The risk of a US Dollar currency “event” is not even close to negligible over the next few years and the added insurance Gold provides as a hedge against such an event is of high value. For a deflationist to say that a geopolitical event couldn’t knock the US Dollar down a notch and wipe out the paltry yield on cash over the past 2 to 10 years is unreasonable in my opinion now that we are the world's great debtor nation. I am happy to give up the current safety of a 2% (or lower) yield on short-term US government debt for the safety of Gold during deflation.

Apparatchiks can decree that Gold is not money but they cannot prevent people from swimming for the lifeboat that has worked for thousands of years. Gold can thrive in a deflationary collapse and has already shown it can outperform the US Dollar in this deleveraging cycle. And if you think China, Brazil, Russia, Germany and India would rather be paid in US Dollars than Gold for their goods and services right now, I think you’re the one who needs to wear the tinfoil hat.

Visit Adam Brochert’s blog: http://goldversuspaper.blogspot.com/

Adam Brochert
abrochert@yahoo.com
http://goldversuspaper.blogspot.com

BIO: Markets and cycles are my new hobby. I've seen the writing on the wall for the U.S. and the global economy and I am seeking financial salvation for myself (and anyone else who cares to listen) while Rome burns around us.

© 2009 Copyright Adam Brochert - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

terry
08 Jul 09, 03:31
nice piece

yes it baffles me how emotional this topic is on both sides of the trade. but nice piece.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules