How does gold perform in deflationary phases?

06.08.2019 - News

created by Arnulf Hinkel, financial journalist

Gold, the world’s hardest currency, has proven a safe haven in times of inflation, i.e. money devaluation, countless times. But how does the gold price react when the exact opposite occurs and money increases in value?

Great depression as an indicator for deflation-driven gold price development

The only global deflation thus far occurred between 1929 and 1932 in the wake of the stock market crash on Black Friday, ending the golden twenties in one fell swoop. Since the gold standard and thus a fixed gold price still prevailed at the time, no empirical findings can be derived today regarding the respective performance of gold. We may, however, draw conclusions based on secondary observations. During the Great Depression, for example, gold stocks went through the roof; increases in value of up to 100 per cent were not uncommon, according to Focus Money.

A further indication of a rather positive performance of gold in a deflationary phase is the historical silver price trend of 1931: while silver saw losses of around 8 per cent, stock prices dropped by 42 per cent in the same period. Since at the time silver was more commonly used for industrial purposes than gold, the latter would most likely have performed better than silver.

Deflation rather unlikely in the medium term

During the global financial crisis of 2008, economists and capital market experts disagreed on the question whether global deflation was imminent. Today, we know that it only actually occurred in a few countries such as Bulgaria, Greece and Spain between 2013 and 2016. In the foreseeable future, deflationary tendencies are hardly to be expected, as a policy of quantitative easing and low base rates across nearly all relevant economic regions counteracts the dangers of money shortages and the simultaneous shrinking of numerous economies.

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