Gold in Deflation: Which Wins?
Inflation and deflation are at each other’s throats, so what happens to gold?
Conventional wisdom says gold thrives under inflation and wilts under deflation. The case for gold under inflation is easy enough: Gold rises as the dollar falls. It’s the opposite under deflation. But is conventional wisdom correct? Is it time to consider gold’s purchasing power relative to consumer prices?
The late Roy Jastram was an authority on the gold standard, and he examined three deflationary periods in history. The first was from 1814-30, when prices fell 50%. The second was from 1864-97, when prices feel 65%. The third was from 1929-33 (the Great Depression), when prices fell 31%.
How did gold do in these three deflationary periods stretching back 200 years?
Between 1814 and 1830, gold’s purchasing power—not its nominal price—increased a thumping 100%; between 1864 and 1897, it rose 40%, and between 1929 and 1933, it rose 44%.
From 1800 to 2010, gold’s purchasing power rose during all three deflationary periods. Its nominal price may not have risen, but gold bought more goods each time. So it doesn’t matter if gold falls when overall prices fall further. Gold is precious, even under deflation.
Gold ended 2009 at $1,096 an ounce. It trades at $1,227 today, $131 higher. That includes a roughly $500 drop between 2012 and 2016.
If you measure gold not by its nominal price but by its purchasing power, history suggests deflation might not be so bad for gold after all.