With all of the attention given to deflation recently, I thought it might be interesting to think about how this scenario could affect gold. After all, gold is thought to be the ultimate investment in a time of inflation. Does this mean deflation will destroy the value of gold?
More interesting than the question, in my view, is the road to the potential answer because there simply isn’t a clear one. However, based on everything I’ve read and researched, the outcome is closer to no: today’s deflation will not topple gold.
1. Gold’s Primary Trend Is Up – Gold’s decade-long chart tells us that if deflation is taking hold, it will not destroy the value of gold. We know this because this chart captures every fundamental possibility including that of deflation and in the face of this possibility, gold’s long-term and primary trend remains very clearly up.
2. Today’s Deflation Will Bleed Into Hyperinflation – I believe the chart above is telling us the story of today’s variety of deflation or the sort that will twist into hyperinflation due to the world’s unsustainable 30-year borrowing binge that’s been transferred to the public sector, and thus sovereign debt and the underlying currencies, from the private sector. Under these circumstances, gold will be subject to the general decline in prices that will take hold under deflation as discussed above, but on a relative basis, gold will hold value due to the collective desire to hoard one of the oldest and most accepted transferrable stores of value.
3. Ultimate Hoarding Vehicle – Sam Hewitt of Sun Valley Gold Company makes the very strong point that in past U.S. deflations, individuals had the choice to hoard either in paper currencies or in gold. “The historical record,” according to Mr. Hewitt, “Demonstrates that loss of confidence in the issuer of paper currency is often a sufficient reason for individuals to choose gold over paper currency.”
While the conversation about the coming collapse of fiat currencies has become rather popular in many circles more recently, the chart above is telling us that many more people have been having this conversation for at least ten years. It is not a coincidence that that the run-up in gold occurred as the world’s debt storm was completing its final phases.
I also believe that the chart above is telling us that there have been many individuals who have been choosing to hoard gold due to a collective lack of confidence in a paper currency that may be pulverized by the U.S. deficit.
….read pages 2-5 HERE