Ok, in the case of massive deflation the price of gold would fall relative to the dollar, as dollars became more and more valuable.
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If there's deflation, what happens to gold?
- Thread starter PlusMinus
- Start date
In your scenario, you mention a 'debt crisis' but that could be different things:
a) the US going cap-in-hand to its creditors, pleading poverty, and seeking to restructure its debt with promises of immediate fiscal puritanism, involving constitutional amendments that required the running of a sound currency, no matter what, and involving the asset stripping of certain government-backed banks, auto-companies etc;
b)money printing continues, bailouts and stimulus continue, new taxes are raised, unemployment continues to rise, a major western country- the UK is an obvious candidate- goes to the IMF, then the US misses a repayment...
In scenario a) gold would probably drop, after an initial panic spike during negotiations, as there really would be dollar deflation. In b), however, given a bad enough smash, the dollar could become de facto worthless. If this happened, I suppose you could say that the dollar had been inflated out of existence. Gold would certainly be very valuable.
I suppose it boils down to luck, and to politicians making judgements about what will keep them in power and in the good graces of historians.
a) the US going cap-in-hand to its creditors, pleading poverty, and seeking to restructure its debt with promises of immediate fiscal puritanism, involving constitutional amendments that required the running of a sound currency, no matter what, and involving the asset stripping of certain government-backed banks, auto-companies etc;
b)money printing continues, bailouts and stimulus continue, new taxes are raised, unemployment continues to rise, a major western country- the UK is an obvious candidate- goes to the IMF, then the US misses a repayment...
In scenario a) gold would probably drop, after an initial panic spike during negotiations, as there really would be dollar deflation. In b), however, given a bad enough smash, the dollar could become de facto worthless. If this happened, I suppose you could say that the dollar had been inflated out of existence. Gold would certainly be very valuable.
I suppose it boils down to luck, and to politicians making judgements about what will keep them in power and in the good graces of historians.
Quote from PlusMinus:
I realize that is the textbook answer. But has it always been true, and would it be true *this time*?
The textbook effect of quantitative easing and currency debasement by central banks is asset price appreciation/(re)inflation...and I think we've seen that this year to an obvious degree. Just look at how it has affected housing prices, they're back on the upswing again, even in the face of record default rates and shadow inventory.
Deflation does make dollars more attractive, and if you're holding many dollars in a deflationary environment, the real return on them is pretty good considering the small risk and convenience associated with holding dollars (i.e. in your bank account, under your mattress, in your wallet, and in your "girlfriend's" G-string).
Don't worry, economics is still a valid science.