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Gold & Silver as a Deflation Hedge

Gold & Silver as a Deflation Hedge

As the BBC publish an article while we write this blog on Renewed Deflationary Fears, the team at Bleyer explore what this could mean to you for the price of Gold and Silver.



We all know what inflation means. Painfully, it's when we see our weekly food shop stay the same size but the bill goes up.  We understand clearly that buying and holding Physical Gold and Silver during these times makes sense. As traditional stores of value (rather than paper money) Gold and Silver hold their value to keep up with inflation, and especially so during hyper-inflation.

DE-FLATION, on the other hand, is less known but just as unpleasant.  Webster defines deflation as "a contraction in the volume of available money and credit that results in a general decline in prices.”

"Typically" explains Michael J. Kosares of The Market Oracle, "deflations occur in gold standard economies when the state is deprived of its ability to conduct bailouts, run deficits and print money. Characterized by high unemployment, bankruptcies, government austerity measures and bank runs, a deflationary economic environment is usually accompanied by a stock and bond market collapse and general financial panic — an altogether unpleasant set of circumstances."


Gold and Silver as a Deflation Hedge


Rhona O'Connell of Reuters states: "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.

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". 

HISTORY FAVOURS GOLD IN NERVOUS TIMES. Although it may seem counter-intuitive, gold can be as effective a hedge against deflation as against inflation; in fact gold's purchasing power is more likely to increase in deflationary periods than during inflationary eras.  Historical precedents suggest that gold's worth is powerful during deflationary periods."

Michael J. Kosares of The Market Oracle agrees and gives a very well known historical example:  "The Great Depression of the 1930s serves as a workable example of the degree to which gold protects its owners under deflationary circumstances.

First, because the price of gold was fixed at $20.67 per ounce, it gained purchasing power as the general price level fell. In 1933, when the U.S. government raised the price of gold to $35 per ounce in an effort to reflate the economy through a formal devaluation of the dollar, gold gained even more purchasing power. President Franklin D. Roosevelt also confiscated gold bullion by executive order in concert with the devaluation, but exempted “rare and unusual” gold coins which later were defined by regulation simply as items minted before 1933. As a result, only those citizens who owned gold coins dated before 1933 were able to reap the benefit of the higher fixed prices. The accompanying graph illustrates those gains, and the gap between consumer prices and the gold price."

Gold and Silver as a Deflation Hedge

"Second, since gold acts as a stand-alone asset that is not another’s liability, it played an effective store of value function prior to 1933 for those who either converted a portion of their capital to gold bullion or withdrew their savings from the banking system in the form of gold coins before the crisis struck. Those who did not have gold as part of their savings plan found themselves at the mercy of events when the stock market crashed and the banks closed their doors (many of which had already been bankrupted).

How gold might react in a deflation under today’s fiat money system is a more complicated scenario. [The Central Bank] wants to inflate, but no matter how hard it tries the public refuses to borrow and spend. (If this all sounds familiar, it should. This is precisely the situation in which the Federal Reserve - and the Bank of England - finds itself today.) In the end, so goes the deflationist argument, the central bank fails in its efforts and the economy rolls over from recession to a full-blown deflationary depression.

How the government treats gold under a deflationary scenario will play heavily into its performance:

If gold is subjected to price controls and restricted ownership, as it was in the 1930s deflation, it would likely perform as it did then, i.e., its purchasing power would increase as the price level fell.

If ownership is not restricted, it would turn out to be the best of all possible worlds for gold owners. Its purchasing power would increase as the price level fell, and the price itself could rise as a result of increased demand from investors hedging systemic risks and financial market instability."

That is a win-win situation for holding Physical Gold and / or Silver, as Silver's price tracks Gold's on the whole, but with more volatility.

Michael J. Kosares adds an important note to this discussion: "That, by the way, is the primary reason governments tend to restrict gold ownership when confronted with widespread bank runs and failing financial markets. Governments seize gold not because they need the money; they seize it to cut off the escape route and force capital flows back into banks and financial markets. As an aside, that is precisely the reason why governments have an interest in controlling the price of gold. Former Fed chairman Paul Volcker, it has been copiously reported, once said, “Gold is my enemy. I’m always watching what it is doing.” Though there is no direct evidence I know of that the Fed or Treasury Department intervened directly in the gold market during Mr. Volcker’s tenure, his statement does reflect the acute interest in gold on the part of monetary policy-makers. Alan Greenspan voiced a similar interest in gold throughout his Fed chairmanship and still does today, though unlike Volcker he has always defended gold and expressed an appreciation for its use as a form of money or final payment or reconciliation. Gold, in the end, is not just competition for the dollar; it is competition for the bank deposits, stocks and bonds most particularly during times of economic stress, and that is the source of enduring interest among policy-makers."

And here is the kind of wealth protection you could be looking at.  "In each of the four deflationary periods since the 17th century in England, gold has increased its purchasing power, by between 42 percent (1658-1669) and 251 percent (1920-1933). In the U.S. there have been three recorded deflationary periods - and gold increased its purchasing power in each of them - by between 44 percent (1929-1933) and 100 percent (1814-1830)" (Reuters).


So is it time for you to either enter the Physical Gold and Silver market, or if you are already in, to increase your holdings and acculmulation?  The products offered by Bleyer fit into any budget. From 1oz Silver Coins to the larger Gold Bars. Rather than think Physical Gold and Silver are out of your reach, we have clients who put a little aside every month to buy a few coins or a small bar and build up their Gold and Silver Savings that way.  If the historical percentage figures are even remotely correct in the next period of DEFLATION in the UK, then it may well be that the wise money enters the gold and silver market now, into products that have the potential to increase in value by anywhere between 43% to 251%.

Call one of the team now to discuss how easy it is to start owning your own Gold and Silver on 01769 618618. This isn't just for the super-rich or those in the know. We at Bleyer believe strongly in Gold and Silver Education, so that the Great British public are as protected as possible for the coming economic storm.

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