9 January 2015

Deflation Hits Europe

It has been an quite a week for the financial markets to start the new year. After falling as much as 2% on Monday, equity markets surged on Thursday over reports of deflation in many EuroZone economies. The news has traders and investors convinced the ECB will begin some sort of quantitative easing program this month or next.

According to an article in Business Insider, consumer prices in Europe dropped 0.2% in the year to December. Germany, by far the healthiest economy in Europe, registered a gain of just 0.1%. In Spain consumer prices fell 1.1% in December from the same time last year. (Source: Business Insider 01/07/15)

In a Bloomberg article, it is speculated that the European Central Bank is currently working on a plan to purchase sovereign debt. The last time inflation went negative was in 2009. (Source: Bloomberg 01/07/15) It does appear after years of trying to achieve a 2% inflationary target that the Central Bank is failing in its objective.

The deflationary forces provide further evidence that there is a disconnect in the broader European economy. The efforts of the ECB have reflated the stock and real-estate markets but have had limited effect in jumpstarting the economy. So with interest rates already at historic lows more quantitative easing is unlikely to produce any sustainable success.

How will Deflation Impact Gold?

If deflation is going to be the theme for 2015, then what will be the impact on Gold? We have said before that Gold is a crisis hedge. It is challenging to predict the next black swan to hit the global economy. In the fall of last year, no one saw the dramatic collapse of the oil market. 

The list of crisis areas in the economy seem endless. Unstable banks; artificially juiced stock markets; debt to GDP ratios that are at or near historic highs; and high volatility in currency markets. These are all crisis candidates for this year.

We have seen Gold trade higher despite crashing oil prices and a strong US Dollar. So Gold does not necessarily need inflation to move higher. We continue to believe that having a portion of assets in physical Gold and/or Silver is the safest portfolio insurance to have.

Author: celticgold.eu

Older Can Europe Handle Another Greek Crisis? Newer Bank Bail-In Update