Gold Also Glitters During Deflations


"AIER analysis: Gold's purchasing power increased by an average of 31% across 15 deflationary periods."

Investors need not worry about trying to time inflationary and deflationary cycles to make gold purchases and sales. It's unnecessary: Gold performs well in both environments, according to a new analysis published by the nonprofit American Institute for Economic Research (AIER).

The AIER report analyzed gold's purchasing power over the 15 deflationary events occurring since 1790 (the first year for which government data are available) and found that, on average, the purchasing power of gold increased by 31%.

Given that each deflationary period lasted approximately five years, gold holders realized a simple annual average gain in purchasing power of about 6%.

"Gold did not appreciate in value during these periods," says Gregg van Kipnis, report author and Chairman of the Board of American Investment Services, a wholly owned subsidiary of AIER. "In some cases, it even declined. Yet purchasing power increased because with one exception cumulative deflation was greater than the decrease in the price of gold."

The one period for which gold's purchasing power did not increase was 1996-98. "The large decline in gold prices may be more related to the collapse in oil prices than to the extent of deflation," says van Kipnis. Oil prices fell by 52%, gold prices by 19.1%, and producer prices by 5.7%. Meanwhile, consumer prices increased 3.3%.

The report also compares the U.S. experience to the United Kingdom's 20 deflationary periods over 416 years. Van Kipnis notes that "the results were similar."

On average, U.K. deflations lasted 6.6. years and prices fell 22%. Gold prices rarely declined and in a few cases increased. On average, gold prices changed by a mere 0.6%, resulting in an average increase in purchasing power of 36% during deflationary periods. There were no instances in which gold prices declined by more than the price level.

According to van Kipnis, "The purchasing power of gold rises because it does not go down in value to the same extent the price level declines. In a portfolio, gold can provide insurance against any kind of price instability."

About the Report:
AIER's analysis is based on data recorded by the Wholesale Price Index, later re-named the Producer Price Index. The United Kingdom data is based on gold price data originally compiled by Dr. Roy Jastrom. Purchasing power was determined by finding the net result of two price movements: the price of gold and the inflation rate. Further calculation methods are outlined in the report, which is available here:

About the American Institute for Economic Research:
Founded in 1933, the American Institute for Economic Research (AIER) is an independent economic research nonprofit based in Great Barrington, Mass.

About American Investment Services:
American Investment Services, a wholly-owned subsidiary of AIER, provides investment management and information based on portfolio diversification, discipline and cost effectiveness consistent with the scientific research findings of AIER.

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