Gold and Deflation
Global stock and currency markets have experienced wild swings as of late due to concerns over the weakening world economy. The continued decline in the commodity sector has many investors worried that deflation is gaining the upper hand and that ultimately the central banks can do little about it.
It seems counter-intuitive that central banks can print trillions of currency units and not be able to create inflation. The truth is some governments do not include food and energy in the way they calculate the consumer price index. So as a result, inflation is higher than the official numbers state, but well below the targets of the Central Banks.
The plunge in oil prices along with the decline of copper below $3 on Thursday does signal that the global economy may not be as strong as some suggest. This is one of the reasons that global stocks have come under pressure this week.
The trend of lower commodity prices may continue for a bit longer. This has prompted many investors to question the performance of Gold should the economy experience deflation.
Gold is More Than an Inflation Hedge
Many investors and traders have been attracted to Gold over the last several years as a hedge should there be runaway inflation due to central bank money printing. One of the reasons Gold has sold off over the last couple of years is that inflation expectations have come down.
Money printing has not yet produced the high inflationary environment that many expected. As a result many investors and traders have abandoned Gold. It is true that Gold is a good asset to own in an inflationary environment. However, Gold is much more than just an inflationary hedge.
So with possible deflation on the horizon many are questioning the need to own Gold. While it is challenging to predict how the coming months will unfold for the global economy Gold is likely to hold up well if deflation win’s out in the short term.
Should a sharp wave of selling hit the stock markets Gold will be sought out for it’s safe haven status unless there is an outright crash in the markets. Even if gold succumbs and trades lower with equity prices in the coming months the declines will be short lived.
In an environment of highly volatile currencies, unstable banks, and general uncertainty in many economies around the world, Gold will hold up better than most other asset classes.
Should deflation come, the central banks will respond with the only thing they know, which is more money printing. This will make Gold the place to be over the long term.
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