Deflation? (not inflation) Investment

I have read many recommendations for coin and bullion when folks write about inflation.

What about deflation? Does that change the bullion and coin topic at all?

Sorry for such a simple question.

 

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Don't apologize, it's not a simple question.

Industrial demand will crash in a deflationary environment, which will hurt silver. In early stages, investors desperate to raise cash will be selling everything, including precious metals: that happened during the recent panic.

Deflation raises the relative value of investments with little or no default risk. This is good for precious metals.

Jewelry demand would drop in Western countries where it's a luxury good. Jewelry is the overwhelming majority source of gold demand. On the other hand in a lot of the world gold jewelry is a form of savings.

Confused yet? If not, I can go on

 

PM's are good in deflation?

I know all the textbooks say that deflation is "good" for PM's, but as i I recall fall of 08 when the banks and stock market crashed, so didn't PM's. Yes silver got his the hardest. Gold didn't get hit as hard as silver, and went down to 700/oz. That doesn't seem very good for PM's in my book...

I'd say paper cash rules in a highly deflationary period. If you had a large amount of cash during this period, you would have made out quite well buying gold at clearance prices during that time.

Gotta stack the paper and the good stuff to keep things balanced. Since they possess an inverse relationship, you can't go wrong holding both.

DYOD

the F to the OG

 

I guess it depends what you consider good. If you are in the market of buying PMs, deflation is what you are hoping for. As is the key with investing in anything, knowing when to buy and sell is always the ticket. If gold ever dips below $600 per ounce again, you can bet I'll be gobbling up as much as I can afford.

 

I agree. People should realize that if we get another round of deleveraging due to a stock market crash or stock market weakness that physical metals may well sell off as they did in 2008. Take it as a potential buying opportunity.

Personally, I think one needs a balance of cash along with physical metals in any case. Each hedges the other because that is the correlation which has been working recently, although that may change. Not investment advice!

 

Thanks everyone... Your responses were helpful.

 

Peter Schiff beleives that the mistrust in the dollar will get to the point when the stock markety plummetts, gold will rise instead of fall. :bigeyes:

 

I agree with FlyGuy, cash is king during a deflationary period. The question is which currency. The U.S. dollar has come back nicely over the past month or so and, I believe, still has room to run after the hammering it took in 2009. Pay attention to currency markets and diversify into what you believe will gain in comparison to dollars. Sell PMs where you can take profits, diversify into cash, bonds or equities that provide a yield of at least 7% and hold. If we are in a deflationary period, then your cash becomes stronger compared with your tangible assets. Keep PM price targets in mind and cost-average on the way down, too. I personally believe gold could go down to below $700 again and will be nibbling for inventory as it falls. Once it hits my target, I will use stronger cash to buy PMs heavily again.

 

Prosperity, not deflation, is what everyone should ALWAYS hope for. It is far better to make money on PMs because investment demand is rising as a result of prosperity than it is to wish for misery in the form of deflation or inflation. Also, if gold ever reaches $600 again, it will indicate that something has gone terribly wrong with the economy and you'll probably be selling gold for food and rent money, not buying it.

 

I agree with you 100%. I in no way hinted I wanted to see what the financial sector did to the market happen again. But in an investment world, this is what the investors are watching. As for gold prices, it many times follows demand, usually follows oil prices, and sometimes nobody can explain why it is doing what it is doing. I just speculate, and buy when I think the timing is right and/or I can afford it.

 

I was about to say something like that and you beat me to it.

I believe things used to be more predictable than they are these days.

 

I try to be very careful in my definition of deflation and inflation. For one thing, people make the mistake of thinking the price of goods going up is inflation and the price of goods going down is deflation. But this is wrong. Inflation is the increasing of the money supply. Deflation is the decreasing of the money supply. Prices only reflect what is happening in the current economy. Take this anecdote as a consideration.

A man wants to be rich. He finds a magic lamp and a genie pops out and grants him one wish. He wishes he had all the money in the world. Now he's rich, right? No, he is poor and so is everybody else. The reason is because he now has all the money and nobody can buy or sell anything because of a lack of a currency in which to trade in. So, someone invents a new currency to make a trade. But, the wish is still in effect and the new currency gets transferred to the man who made the wish to have all the money in the world. So, more money is made and this continues until there is so much money that it is ridiculous. If the spell should be broken and all this new money where available, do you think this would be inflationary or deflationary?

My point is that the reason people fear deflation is because the unemployment rate is horrid. People don't have money to buy the things that they need. But it is foolish to think there isn't a lot of money out there. As a matter of fact, the money supply has more than doubled in just two years. When the genies spell is broken, you bet your a** it is going to be majorly inflationary. So, are you narrow sighted and looking for a quick profit? Or are you future sighted and looking to protect your current investments and wealth?

 

Deflation also has to do with the purchasing power of the currency of your home country. If you experience major deflation for instance, and your domestically built products become very expensive globally, your exports will decline rapidly. This is a big part of the current recession we are in right now, and is one of the reasons I was laid off ten months ago.

 

It's a little more complicated than you suggest. Inflation is a condition when there is a general increase in prices of goods and services in the economy because the rate of increase in the supply of money exceeds the rate of increase in demand for money. Deflation occurs when there is a general decrease in prices because the rate of increase in the supply of money is less than the rate of increase in demand for money. The absolute increase or decrease in the money supply doesn't necessarily indicate the inflation/deflation condition.

Also, your statement about the money supply doubling over the past two years is evidenced by the graphs in the link below. The absolute levels are up, but the rate of growth is decreasing-to-negative depending on the measure used.

http://www.shadowstats.com/alternate_data/money-supply-charts

 

I read in many places that people are saving more money then they were two years ago. Yet, the money supply has increased in the last two years. So, since people now save more money, they have less need for it. Less need and more money is inflationary.

In the quantitative theory of money, there is another variable known as the velocity of money. This is the only reason that things would be deflationary, because the money isn't changing hands as often as it should. This situation can't last forever. The facts are more money, and more savings.

http://thedailygold.com/contributors/clive-maund-unlock-profits-with-technical-analysis/?p=2046/

 

That is why I indicated that the demand for money is also as important as the supply.

 

So sorry about the layoff.

 

In more simplier terms, my dad said the same thing.

Since I know that I do not pay attention enough, I was concerned that I would miss obvious signs of when a market would go up after swinging down (like silver might in a deflationary cycle).

I missed gold's up tick of a few hundred after buying in the mid 400s back in early 1990s. Silver was about 5.5 then. After 1998, life became more complicated and I missed out on a lot of PM opportunities.

 

Thanks for the reality wake up. I like the spin on "Prosperity." That would be a nice twist for PMs.

I wish I would be more optimistic.

 

Thank you. I did get over it though. Too bad the job was the best one I've ever had.