Gold Price to Keep Rising as Deflation Hits, US Dollar Loses Value

A Dear Reader asks:

“I am a New Zealand subscriber to Markets and Money and a reader of Empire of Debt.
“I realise many of the arguments for inflation as being good for gold. Where I have trouble is making a case for gold rising during deflation. The fact that gold rose in value in the 1930’s I believe is not relevant. The U.S.A. is off the gold standard and cannot arbitrarily change the price of gold.
“So, how does deflation increase peoples’ desire to hold gold?”

The case for gold is obvious when consumer prices are rising. Gold tends to rise along with them…and then races ahead, as people turn to gold to protect themselves from inflation.

How about when prices are falling? Isn’t it better to hold onto to cash – even paper currency – rather than gold? Well, yes…and no. Falling prices mean that the currency itself is becoming more valuable. As long as that is happening, gold is not needed for protection – at least, not against falling currency.

But when prices fall, typically, they do not fall alone. Instead, they come plunging down along with businesses, junk bonds, hedge funds, stocks, careers, property values, retirement plans and credits of all sorts. People become worried about the quality…that is, the real value…of their assets. They look for something solid to hold onto…a way to protect their assets from markdowns, defaults and bankruptcies. Gold, the only credit that is not also someone else’s debit, is a good way to avoid depression-style losses. You don’t have to worry about someone making his monthly payments, or a business paying its quarterly dividend or making good on its bond coupons. Gold pays no dividends or interest. But investment returns go negative in a deflationary slump; as we pointed out yesterday, the ‘cost’ of holding gold goes down…and then turns, relatively, positive.

Another thing that happens when economies face deflation is that monetary authorities tend to panic. Pretty soon…up is down…down is up. A genuine consumer price deflation in America or Britain would be so painful our central banks, and our political leaders, couldn’t stand it. Consumers have too much debt. How they’d howl!

This summer, equity prices fell less than 10%. Still, within days, it sent central banks scrambling to get more credit into the system. Imagine what would happen if stocks went down 20%…or 50%! Ben Bernanke said he would drop paper money out of helicopters, if that were what it took to avoid consumer price deflation. We don’t have to tell you want would happen to the value of the currency. Even before the helicopters took off, it would be in freefall…with gold rising on the other side.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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7 Comments on "Gold Price to Keep Rising as Deflation Hits, US Dollar Loses Value"

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Two questions, tho: 1) When prices fall along with everything else – as you point out – people rush to sell whatever solid assets they have so they can meet their obligations. Why would they not sell off gold as well? Thus driving the price DOWN…and making gold a losing investment during deflation? Good time to BUY it then, maybe…after the sell-off…? 2) Again, as you say, monetary authorities would panic – the central banks would sell their gold in an effort to keep prices down, I would think. Again, doesn’t this mean that in deflation we’re better advised to… Read more »
Gold owners hopefully would not be carrying any obligations at this stage of the credit cycle, so they won’t need to sell their gold. During a deflation, gold increasingly comes to be viewed as money and can be seen as an alternative source of liquidity. The ‘price’ of gold could still fall, but not nearly as fast as the prices of other assets. Remember wages will also be falling, so gold will become increasingly important to the saver, and therefore increasingly sought after. Central banks know all of the above and will be keen to keep what little gold remains… Read more »

Correction: India no longer has export restrictions

In a deflation scenario, 1. I wouldn’t put my cash in the bank, because I am afraid the bank would go bankrupt. It simply means the bank borrows money from me and then says “sorry I can’t repay you”. Physical gold wouldn’t have this problem, unless you lend it to somebody for interest. 2. I probably will buy government bond or get cash stored in my bank deposit box. But most likely the central bank will keep printing money via social welfare system or government spending. I don’t object people to own physical bond or physical cash. But before the… Read more »
“home building, a most mercurial industry, had been falling for several years, and it slumped still farther in 1929.” The Great Crash,1929, chapter v, by J.K. Galbraith my dad was a runner on wall street when the crash occurred. he spoke of this thing that came out of nowhere; people jumping out of windows, banks offering to pay part of your deposit if you agreed to fore go the balance, how he lost a good friend who borrowed some money and never paid it back, sweetening his coffee with a lollipop because sugar was expensive,etc. he was a smart kid… Read more »
Just stumbled across this and a year after the last post, things certainly have changed. And gold IS going down just as predicted because entities are selling it to make ends meet. The government HAS panicked a with the trillion dollar credit bail. We appear to be heading into a strong deflationary period, with oil now following home prices and stocks downward big time. So we are about to find out what will happen AFTER the massive sell off to meet obligations, wanes. If it is a worldwide deflation its a complete toss up as to where gold will end… Read more »
Keith Guyman

Isn’t anyone’s guess. I can see the validity in maintaining property that has worth to the individual. Gold always will have worth. It may not be as to convert into cash readily as other items but it least doesn’t have the downside of bonds, bank accounts, stocks and CD’s it is not imaginary and based on others obligations and purported worth. Gold is not debt painted over.

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