Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Gold and Gold Stocks Behaviour During Deflation and Inflation

Commodities / Gold & Silver 2009 Mar 18, 2009 - 05:27 AM GMT

By: Jordan_Roy_Byrne

Commodities Best Financial Markets Analysis ArticleI've heard more than a few pundits question an investment in gold or gold stocks in the current environment. They point to deflation and the lack of inflation in the foreseeable future as reasons why precious metals should be avoided. Sounds intelligent on the surface but it reveals to this analyst, a lack of any thought and analysis.


We must remember that success in trading and investing often requires a counterintuitive approach. The markets often go the opposite way they should. Here are a few examples. Gold was in a bear market for 20 years despite what can be called a credit hyperinflation in the United States. Gold has performed spectacularly this decade in the absence of the kind of price inflation we saw in the 1970s. Treasuries have risen this decade along with Gold, Oil and Commodities. When has that happened in history?

Now back to precious metals. The main idea for investing in this sector is to protect your purchasing power or protect against inflation. So it makes sense to buy the sector during an inflationary period. Right? A look at history combined with some common sense analysis reveals that precious metals and the producing companies outperform during deflationary periods and in advance of an inflation cycle.

Let's look at the 1930s and 1940s. The Great Depression initially was a deflationary event but it concluded in inflation. Using the calculator from inflationdata.com, I calculated the change in prices in the 1930s and 1940s. In the 1930s, prices fell 18%, while they rose 70% in the 1940s. But what happened in the markets?

Which gold bug hasn't seen this chart of Homestake Mining, from http://www.gold-eagle.com. If I remember correctly, its bull market lasted from 1921 to 1937. The stock made a lower low in the early 1940s and wouldn't surpass its Great Depression peak until the 1960s. The stock performed especially well from 1931 to 1934, during the later stages of deflation and initial stages of inflation.

This is a chart of the Barrons Gold Mining Index, dating back to 1939. Thanks to http://www.bgmi.us . The rectangle shows 1940 to 1950. There was deflation in the 1930s and huge inflation in the 1940s. Yet the gold stocks performed far worse in the 1940s.

It was the commodity sector that prospered most during the inflation of the 1940s. The rectangle shows 1933 to 1951. Chart from TopLine Investment Graphics: http://www.topline-charts.com/ .

The reality is that the precious metals complex outperforms AHEAD of reinflation, while the rest of the commodity sector outperforms DURING the ensuing inflation. Gold stocks perform best when their margins are expanding. That can happen when the price of Gold stays flat and cost inputs (oil, steel, labor) fall. It can happen when gold rises and rises faster than cost inputs. When inflation begins to take hold, the precious metals complex has already anticipated it. Inflation raises the cost of everything. As the cost of steel, oil and labor rise, it hurts the profit margins of gold producers. Hence, gold companies outperformed during the deflation and early reinflation of the 1930s, but underperformed during the inflation of the 1940s.

How did the gold stocks do in the 1970s? The aforementioned BGMI index, rose from a bottom of less than 100 to a peak of about 1300. Let's call it a 14-bagger. Outstanding right? Well, consider that the price of Gold rose from $35/oz to as high as $888/oz. That is a 25-bagger! Gold stocks unperformed Gold despite a rising gold price. Why? Because of rising commodity prices and rising inflation, gold companies didn't benefit as much as you'd expect. In relative terms, gold stocks were better performers in the 1960s. The BGMI rose very nicely, while the price of gold remained fixed.

In the early 2000s, there was a fear of deflation. As you can see from the chart below, from 2001-2003 gold stocks strongly outperformed gold as well as commodity stocks. Gold bottomed before the rest of the commodity sector and advanced before inflation began to take hold. As inflation began to take hold, the gold stocks underperformed both gold and commodity stocks and even while the price of gold rose from $600 to over $1,000.

Conclusion

It appears the consensus is wrong on both counts. One side says there is no inflation on the horizon, so the precious metals sector isn't an appropriate investment. The other side says that there will be hyperinflation, so buy gold. Hyperinflation may be good for physical gold but it is deleterious to everything else including society and the political structure. The reality is that the current macroeconomic environment is most advantageous for gold stocks and then gold. However, if and when inflation begins to take root the precious metals complex will underperform and your funds will best be utilized elsewhere. For more on this analysis, visit our website and consider joining our newsletter. Good Luck!

By Jordan Roy-Byrne
trendsman@trendsman.com
Editor of Trendsman Newsletter
http://trendsman.com

Trendsman” is an affiliate member of the Market Technicians Association (MTA) and is enrolled in their CMT Program, which certifies professionals in the field of technical analysis. He will be taking the final exam in Spring 07. Trendsman focuses on technical analysis but analyzes fundamentals and investor psychology in tandem with the charts. He credits his success to an immense love of the markets and an insatiable thirst for knowledge and profits.

Jordan Roy-Byrne Archive

© 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