Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Pricing Gold in Deflation

Commodities / Gold and Silver 2011 Jun 04, 2011 - 11:15 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleStoring value, rather than trying to grow it, is taking the lead once again...
 
GOLD GOES UP when cash and bonds fail to beat inflation. True in the Seventies, and true again in the last decade.


Both times, gold also beat both stocks and industrial commodities as well. Perhaps because storing value, rather than trying to grow it, takes precedence when the cost of living eats into your capital.

But now, from here?

"Markets don't expect inflation; professional forecasters don't expect inflation, and economists who know how to do their job don't expect inflation," claims academic economist Brad DeLong on his blog.

Nevermind that inflation-linked 5-year Treasury bonds do see inflation ahead, or that the global gold market clearly fears it. Never mind that conventional Treasury bonds didn't wake up to the 1970s' inflation until 1980, and nevermind today's "fail" for professional forecasters on May's US jobs data. (But hey, they were sold a pup by March and April's false readings). And nevermind that economists-who-know-how-to-do-their-job are all too often now in a different job, trying to run the economy rather than observe it, and opting everywhere to devalue money at the fastest pace – accounting for post-inflation interest rates – in well over three decades.

No, "Whichever inflation measure you prefer, there's no reason to tighten," as DeLong's fellow economist Paul Krugman puts it, blogging at the New York Times.

So what if inflation goes negative – making real interest rates positive, even if the official rate is slashed even to zero? Outside early-2000s Japan and the global wipe-out of spring 2009, modern history offers no examples. Both times, expert economists urged policy-makers to cut nominal interest rates below zero somehow, either by printing money to excess or taxing bank deposits or generally destroying cash, so that real rates could also stay negative.

Both times, gold rose in nominal and real terms as well. What gives...?

Here in May 2011, there's a "disparity developing" between industrial and precious metals, notes the latest Commodities Market Attributes report from Standard & Poor's.

Dividing its own S&P GSCI Industrial Metals Index by the Precious Metals Index, the agency tracks the relative strength of useful metals against the less industrially useful (but more socially valuable) metals gold and silver.

"This ratio generally has been positively correlated with the S&P 500 [US equity index]," says the report. Which makes sense, because industrial demand and risk-capital will tend to move in the same direction. But "the ratio declined again in May," says S&P, down "to essentially the same level it hit at the end of May 2009.

"What is disconcerting for many analysts is the fact that the S&P500 has increased 54.23% over the same two-year period. The implication is that extremely low interest rates and quantitative easing are likely influencing the level of real assets. At the same time, the ratio of demand for direct economically-related industrial assets...is not keeping up with the demand for store of value assets."

More telling still, S&P's Market Attributes also prints a chart of the S&P equity index against the ratio of gold-to-silver prices. It shows (see page 5) how a falling ratio – with gold becoming less valuable in terms of its industrially useful cousin – usually coincides with rising stock markets. But the gold-silver ratio has just jumped, up from a three-decade low near 31 ounces of silver for 1 ounce of gold to 40 and above.

"Risk-Off and Demand Destruction," is how S&P's report sums up May 2011. Pointing to the rising value of gold – against silver, the other industrial commodities, and common stocks – is simple shorthand, too. Because storing value, rather than trying to grow it, also takes precedence when the risk to your capital is that it might vanish altogether as debtors and businesses go bust amid a true deflation in prices.

That's if deflation gets chance, of course, before economists and central-bankers get to work destroying your savings first.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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


Post Comment

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

6 Critical Money Making Rules