News, analysis and commentary for gold traders and investors

"Be Right - Sit Tight"

Jesse Livermore
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Gold Market Wire

News, analysis and commentary for gold traders and investors

The Long View

Inflation, Deflation and Gold

April 15, 2020 - (Gold Market Wire) - It is often said that Gold is a hedge against inflation, but that is not actually the case. Witness the events of the past two months and consider: If the velocity of money was a problem from 2008-19, just imagine just how low it must be now. It will be, nearly non-existent. Why then is Gold rising in such an extreme deflationary environment. Wasn't Gold supposed to react to inflation?


The economic reality is that Gold reacts to both extremes well, because Gold is actually a barometer of political and economic (read monetary) confidence. That confidence is now sliding away with the macro-economic future which is rapidly becoming no future at all. The looming threat of bank bail-ins, mass business failure and electronic money, which will probably be used to cull accounts, after a decade of 0% interest rates, means confidence has been shot through. Truly, if anything causes one to scratch their head, it is that Gold is not significantly higher than it presently is. That is probably on the horizon.


The debt based economic model is imploding. As if the Repo crisis in September 2019 didn't signal a serious enough problem in interbank lending, the world's government bond markets are now simply figments of a collective, if deluded, imagination. They don't actually exist. A default the size of the mother of all tsunami's is coming before long and it is going to create further deflation. Velocity, already at a standstill, will contract beyond everyone's wildest dream.


And then, the reset that has been spoken about for so many years will be with us.


That reset will be one based on attempts (yet again) to generate inflation and institute debt repudiation on a mass scale, much as it was in the 1920s and 30s. (How must Ray Dalio feel about his "cash is trash" statement now, one wonders?) Asset deflation – i.e. - deflation in the things one owns, will be combined with a massive inflation in the things one needs to survive, like food. Monetary inflation will be restored, not by trying to buy-in long-dates bonds, like the ever-repeatedly failed QE attempts, but with outright printing of money. The Bank of England is beginning to activate such policies. Usually they are the precursor of international conflict.


In such an environment, Gold will have a place, both within the present deflationary and the future inflationary environments. The critical question will be the political environment in which gold will exist. If it is strongly authoritarian then the asset form gold takes will be as important as its official “price”. The pools and ETFs may not function and could be confiscated.

Until the day the reset begins, one can look forward to a burgeoning market in Gold from which one may then, in part, deflect the effects of the inflationary future.

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