Sunday, November 20, 2016

Dan Popescu - Gold and Deflation

In this article Dan Popescu lays out his argument as to why gold will work as an insurance hedge in either a major inflation or major deflation scenario. This is an ongoing topic of discussion by those interested in things that could bring about change in the global monetary system. Below are a couple of excerpts from the article.


"Since the start of this gold correction in 2013, the most bearish argument I hear is that there is no risk of hyperinflation or even high inflation, but rather a risk of deflation (or a negative inflation rate, not to be confused with a lower rate of inflation increase, or disinflation).        What to make of it?"

. . .  .

"How did gold react in prior periods of deflation? Roy Jastram, author of an excellent book on gold, The Golden Constant, has identified three major periods of deflation: 1814-1830 (16 years), 1864-1897 (33 years) and 1929-1933 (4 years). The only monetary parameter that stayed constant throughout those periods has been gold. A given quantity of gold would have been traded for 80% more commodities in 1896 in the United Kingdom than twenty years sooner. Between 1920 and 1933, prices fell to their lowest level in British history. Gold reacted by increasing in price at the same time as commodities until it peaked in 1920. The gold price index stayed constant, within one decimal, for 90 years. Then, between 1918 and 1920, it jumped by 33%.

Roy Jastram concludes that, during periods of major deflation, the operational value of gold increases. He also concludes that gold maintains its purchasing power over long periods of time (half-century intervals), not because gold moves toward commodity prices, but because commodity prices return to gold.

"By de-stabilising the banking system and the monetary system, deflation creates a period of chaos and uncertainty, which is quite positive for the price of gold."  

 . . . .

"In conclusion, in a hyper-inflationary period gold will reflect the devaluation of paper/electronic money while in a deflationary period it will reflect the collapse of the banking system and people will resort to gold as in extremis money again."

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