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Can gold protect you in a Deflation?
Inflation and deflation are possible scenarios in a financial downturn. Experts disagree as to what the next financial crash will bring us, and what will be the reaction of the markets to the Federal Reserve’s reaction to the financial downturn. This means, we might see a rotation between Inflation and Deflation. Which leaves us no choice but to assess where gold stands in either situation. It is “common knowledge” that gold does extremely well under inflation but poorly under deflation. The premise is that gold rises when the US dollar falls—and vice versa. But, the same logic dictates that during deflation where prices across the board drop, as the dollar gains strength, gold loses its own. It may be time, however, to change and expand our view on the behavior of gold. What if we measure gold’s value by its purchasing power relative to consumer prices instead of by its nominal value? This means we will not look just at the price of gold (nominal value); rather, we will look at what the new price of gold enables the holder of the gold to purchase (“purchasing power”).
Historical evidenceWith his 1977 The Golden Constant: The English and American Experience, 1560–1976, Roy Jastram became an authority on the gold standard. He examined three historical periods of deflation:
- From 1814 to 1830, prices dropped by 50%.
- From 1864 to 1897, prices dropped by 65%.
- From 1929 to 1933, prices dropped by 31%.