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Deflation: When Bad Things Happen to Gold Markets

You know, with the world’s stock markets so volatile, I keep expecting that gold prices are going to soar and all the jewelry I’ve acquired over the years will instantly become worth a great fortune.  (It always has been worth a great fortune, but so far, only to me.) But at the moment, it seems the opposite has happened.

Commodities are sinking, the dollar is strengthening, jobs have contracted for 9 straight months with no end in sight, banks do not trust each other, consumer spending is declining, foreclosures are soaring, and people are actually saying the word “deflation.”

Given that gold is money, and money should do well in deflation, one would expect the purchasing power of gold to rise. Gold, especially in real terms is soaring. But miners have gotten pounded. Why? Hindsight may be 20-20 (or not) but here are a few possible explanations.

Mining stocks are leveraged compared to gold and a massive unwinding of that leverage is taking place, especially by hedge funds. There are now ongoing funding questions for some of the miners and explorers. There has been indiscriminate selling of virtually everything.

But government bonds and gold are both rising as the world’s banking system cracks under the weight of the biggest debt expansion in history.

Gold is in the green, with the U.S. dollar is soaring along with treasuries. Global equities, corporate bonds, and commodities in general are getting hammered. This is entirely consistent with most economists the deflation theories.

Those believing in stagflation, hyperinflation, or some sort of 70’s rerun can now kiss those theories goodbye. Deflation is here and now, the only question now is how long it lasts. And whether we’ll see it in the retail jewelry markets.

A piece of gold jewelry that is truly loved is always a good investment, but not one that can be recouped at an early date. For the best investment value, buyers should choose a piece they want to wear regularly. That way, they’ll get their investment and wear it, too.

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