The Impact of Inflation and Deflation on Gold

The Market Gage - Dillon Gage's Precious Metals Newsletter

How do I expect gold to react in a deflationary environment or inflationary environment? Gold can be a hedge against either.

When an economy is in serious trouble for financial assets, raising inflation depresses bond prices and creates stress in foreign exchange markets. Rising inflation also distorts equity prices and the value of stocks. Gold then becomes the safe haven asset during rising inflation.

When the economy is in a deflationary spiral, stock prices deteriorate, company debt rises and the future profit outlook declines. Sovereign bonds become more attractive, but increasing global deflation increases the possibility that the government will get involved in a competitive currency war that devaluates their currencies trying to export deflation. In my opinion deflation is a disaster for those who are indebted because the dollars needed to repay those debts are deflating away, making debt ever harder to pay off.

Is the United States, due to the poor policies adapted by the FED, are we on the edge of a deflationary economic environment? Will the U.S. public lose faith in in our currency as the U.S. dollar is backed by nothing except government promises to pay off the debt. And is there any government official out there willing to address our runaway debt? Not to mention the ever increasing cost of entitlements facing this nation?

When the public loses faith in the financial system, which is associated with deflation, panic ensues and people turn to hard assets like gold. So, gold is a reflection of the overall faith or lack of, in the economic and political system.

One just has to open up the global window and see the situations facing the European community who are at odds on how to manage the never-ending saga of Greek debt. The International Monetary Fund insists that Greece cannot meet its budget goals without easing debt, while Germany remains skeptical of giving Greece more time to get their house in order. Let’s not forget the Brexit vote leaving Germany and France supporting the rest of the European community.

Meanwhile in Japan, negative interest rates continue inspiring individuals to buy safes to store their wealth, as putting money in the bank is a bad idea. Just recently the Bank of Japan announced that it will update its debt buying policy to keep the yield of the 10-year Japanese government bond around zero percent and leave the negative rate policy intact. Another problem for Japan is that 25 percent of their population is over 65 years old.

I can go on and on with discussing economic distortions around the globe, but what’s the point? I think you get the picture. For any informed investor, a balanced portfolio that includes owning physical gold is a smart choice in any economic environment.

Have a wonderful Wednesday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.