Home InfoVault Market Reports Gold Prices In Deflationary Conditions

Gold Prices in Deflationary Conditions

Gold Prices in Deflationary Conditions
Category: Market Reports
Author Name:
Posted: 02-26-2016 12:16:00 PM

So I expect, if the rally in the gold market continues in March and there is no increase in the Fed Fund Rate, a strong interest in the physical metal will be in order.

I’ve been asked to talk about what could happen to the price of gold in counties that are battling deflationary conditions such as Switzerland, Sweden and Denmark. Recently these countries began a negative interest rate policy to combat deflationary pressures.

In a deflationary economy, most would prefer to hold a liquid hard asset like gold. There will be some who would hoard cash leaving it out of the banks as most refuse to pay the banks to hold their money. This becomes a very dangerous situation for any economy. When money hoarders take cash out of circulation to use it as an insurance policy for tough times ahead, it creates a self-fulfilling prophecy. In the end businesses will close as they will be selling less goods and services. This strategy in turn creates higher unemployment. Not a good outcome. This might also spur a governments control over actual cash. Governments want cash in circulation to increase money supply. Hoarding is the opposite. Once governments move to control real cash, demand for physical will spike.

Did anyone hear of the term beggar-thy-neighbor? Beggar-thy-neighbor is an international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation’s economic difficulties at the expense of other countries. While the policy may help repair an economic hardship in the nation, it will harm the country’s trading partners, worsening its economic status.

I guess you can say using the policy of beggar-thy-neighbor sounds like someone sticking their nose up at a former friend and ally.

Since the negative rates went into effect in these countries, gold purchases have been on the uptick. There is no doubt that the smart money will turn to gold hoping for a strong return on their investment.

What seems to be the case today with the majority of countries I mentioned experiencing negative interest rates (and let’s include Japan in that group), we are witnessing better than average physical demand.

Here in the states, the majority of the gold purchasing has been in the form of ETFs. The reason? Recent strong volatility in the equity markets along with a strong view that equity prices have peeked. And no one can ignore lower oil prices.

With everyone witnessing depressed commodity prices for a long time, (along with my reasons above), a good number of retail investors, along with some fund managers, have decided to diversify a portion of their equity holdings into gold. Since the beginning of the year, these trades have created momentum to the upside in the price of gold.

So I expect, if the rally in the gold market continues in March and there is no increase in the Fed Fund Rate, a strong interest in the physical metal will be in order.

To summarize: in the end, either in an inflationary environment or a much dreaded and dangerous deflationary environment, “Gold as an investment increases in interest.” But if I had to choose one, a deflationary environment would get the nod.

© Copyright 2021 ModernCoinMart (MCM). All Rights Reserved. MCM does not sell coins and numismatics as investments, but rather as collectibles. Please review MCM's Terms and Conditions, Terms of Use and Privacy Policy before using this website and prior to purchasing from MCM. All website content is for reference use only and does not constitute investment, legal or financial advice. We encourage the sharing and linking of our information but reproduction of our news and articles without express permission is prohibited. Instead of reproducing, please provide the link to the original article or use the share buttons provided.

About The Author

Walter Pehowich Author Name: Walter Pehowich
This editorial has been prepared by Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept the foregoing.

What are your thoughts? Gold Prices in Deflationary Conditions