Deflation gold relationship to the dollar

Deflation and Gold - Explained | Sunshine Profits

deflation gold relationship to the dollar

The coming GREAT DEFLATION will impact the value of Gold and the Dollar much differently than what most analysts are forecasting. The coming Great Deflation will destroy the value of most Stocks, Bonds, Real Estate and Paper Currencies. There is a common view in financial markets that credit deflation is bad relationship between gold and the US dollar in the great depression.

Hence, each remaining unit is more valuable; i.

deflation gold relationship to the dollar

Government causes inflation and pursues it for its own selfish reasons. A government does not voluntarily stop inflating its currency. So what causes deflation? Government causes deflation, too.

Deflation happens when a monetary system can no longer sustain the price levels which have been elevated artificially and excessively.

deflation gold relationship to the dollar

Governments love the inflation they create. But with even more fervor, they hate deflation. And not because of any perceived negative effects on its citizens.

The ‘Great Deflation’: How Will it Impact Gold & The Dollar? -

It is because the government loses control over the system which supports its own ability to function. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything stocks, real estate, commodities, etc.

It would translate to a very strong US dollar. Those who hold US dollars would find that their purchasing power had increased. But the supply of US dollars would be significantly less.

The relationship between gold and the US dollar is similar to that between bonds and interest rates. Gold and the US dollar move inversely. So do bonds and interest rates. If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining. But it is not shared by the majority of ordinary savers around the world who see it still as the ultimate store of value at a time of fiat currency inflation.

deflation gold relationship to the dollar

For them, gold is the money to save, driven out of circulation by inferior currencies. We know this to be true throughout Asia where the bulk of the world's population lives; but even millions of ordinary Americans continue to accumulate silver eagles because they still recognise the monetary attributes of precious metals. Crucially, the assumption in capital markets that gold is no longer money but just an asset or commodity has all but destroyed our understanding of its monetary relationships.

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Financial analysts fail to appreciate the difference in behaviour of sound money compared with that of unsound money during a contraction of bank credit.

The whole point of unsound money is that it can be devalued relative to sound money, as it was at that time, in order to stabilise prices that would otherwise fall; a policy option that is not available to central banks adhering to a gold standard.

deflation gold relationship to the dollar

In the days of a gold - or more correctly - a gold exchange standard, the collapse of excessive bank credit was always sudden, and vicious in proportion to the previous expansion. Since credit was expanded out of thin air by banks without underlying stocks of gold to cover it, inevitably slumping prices became associated with bank failures, and central banks were set up to insulate commercial banks from this brutal reality.

Saving over-extended banks always requires the artificial lowering of interest rates and the expansion of the money quantity to restrain the currency's purchasing power from rising against declining commodities. Gold therefore remains a store of value for savers because it cannot be devalued in this way by a central bank.

Gold and the Upcoming Deflation Cycle

This is becoming relevant again given that the escalating credit problems in China appear to be leading towards a style stock market crash, which if it follows the well-established playbook, will be followed by an economic slump.

Today China is the largest commercial consumer of commodities, just as America was in the late s, and her slowing economy is putting downward pressure on commodity prices, pushing up the purchasing power of money of the other major currencies.

Put another way, falling energy and commodity prices in yuan are forcing deflation upon the rest of us. So even though investors in gold have seen its dollar price trade broadly sideways for the last three years, its purchasing power measured against most commodities has actually been rising.

More recently, gold has also been an effective store of value against weaker currencies, notably the euro and yen.


Now that China's credit deflation is beginning to be exported to the US through lower commodity prices, there is a growing assumption that the dollar will strengthen further.

This has encouraged hedge funds to sell gold futures to capture the dollar's rise. In terms of purchasing power it is certainly true that the currency has a deflationary element in it.

However, if the Federal Reserve refused to expand the quantity of dollars in circulation, abandoning commercial banks to face the full force of a credit contraction, the purchasing power of the dollar would rise as if it were sound money.

But the Fed was set up to do the exact opposite, so it has a clear duty to weaken its currency in this event. Therefore, when the balance of risk swings towards a credit contraction in the US, gold will rise against the dollar because the Fed through its monetary policy is certain to ensure it does so.