Gold as a Hedge Against Deflation


"Stresses in the banking sector add weight to the argument that deflationary fears should underpin gold prices."


Gold has a history as a hedge against inflation, or more precisely, inflationary expectations, but what is not often considered is its role in a deflationary environment.

Since the United States Treasury closed the gold window in August 1971, the world's major economies have been almost continuously in an inflationary environment.

The year-on-year change in the consumer price index (CPI) in the U.S. has been negative in just eight months since August 1971 and all eight of these were in one consecutive period from March to October 2009. In Germany, just 12 months fit the criterion, of which eleven were in 1986-1987.

Now, however, recent figures from the U.S. and China, plus persistent problems in Europe and commercial banks' reluctance to lend, have rekindled fears of an imminent period of deflation.

There has been little hard evidence of gathering deflationary forces. However, the stresses in the banking sector and gold's historical performance during deflationary phases add weight to the argument that any deflationary fears should underpin gold prices.. . .View Full Article

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