Despite being a highly misunderstood asset (in my opinion) regular readers know I have no hatred of the yellow metal. In fact, I love any asset that has potential for appreciation regardless of its tangible “value”. Like a good view, this precious metal carries a certain intangible value. Of course, as a form of currency, I think investors are sorely mistaken, but that doesn’t mean it won’t continue to act like a currency as I am in an overwhelmingly small minority who believe a return to gold as a currency is nothing short of absurd. Nonetheless, in the midst of this endless deflation vs. inflation debate I did a bit of homework on gold’s performance during deflation (since we all know it will outperform in an inflationary period). The results were a bit surprising.
Gold performance during deflation is difficult to come by since it’s such an unusual event, but JP Morgan did a bit of time traveling back to the Great Depression to study the price action in silver (since gold prices were fixed):
“How can the decreed gold price of the 1930s help us now that the gold price is floating? We decided to seek a proxy. Until relatively recently, silver was a partner monetary metal to gold, with very large tonnages in circulation. The advantage of silver is that a market price is available for the 1930s.”
What they found was interesting. Silver performed well in relative terms:
“Figure 7 shows how, after peaking in 1929, the DJIA fell sharply to less than a quarter of its peak value. Gold, because of its fixed price, was unaffected. Silver fell too, but it significantly outperformed the reported DJIA on the way down. What is also encouraging is that after the deflation bottomed in 1932-1933, silver bounced back quickly, and by 1934 it was higher than its 1929 level. Intriguingly, gold seems to parallel this with its repricing to $35/oz in 1934. This seems to suggest that even after a very tough pre-Keynesian (deficit spending) deflation, the bounce back significantly helped the precious metals. With modern economists already pointing to the money presses as the best medicine against deflation, any postdeflation precious metals bounce is likely to be more vigorous.”
Interestingly, commodity linked metals were not so fortunate. Copper prices, being very economically sensitive, performed more in-line with equity prices:
“As a check, we also looked at copper's performance during the depression to differentiate between monetary and commodity metals. However, this test showed that copper's price performance was very similar to that of the Dow.”
All of this bodes well for gold and silver prices in a deflationary period (as early 2010 has clearly shown us):
“The performance of silver gives us confidence that precious metals are likely to outperform the general markets in a downturn. In a really tough deflation, the absolute price levels of the metals could weaken, even as they outperform most other sectors.”
Updated: It should be noted that the recovery in silver prices were primarily due to government intervention as opposed to natural market forces. Therefore, the period prior to 1932 is a better proxy for silver price performance, which, was still down dramatically. On a relative basis (compared to equities), however, silver prices clearly outperformed. Sorry for any confusion.
Source: JPM
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What were the DJIA’s dividends? What was the cost of carry for the metals?
C’mon PC, you know better than to post this wooly thinking.
And have you seen that the the G/S ratio continues to however above 65? That is major kick-butt Dude!
We are sittin’ on the fence gettin ready to do a whoopin’ on SLV in take-form!
Unfortunately, for some of us we did a “baddy” by re-leveraging ouselves in the PM market. We’re about 5 months from getting that shed out!
Did you see that WSJ article on re-leveraging yesterday? Wow! That’s what we did; now our focus is on paying our debt down! We’re finished (well almost)!
Man, can I bet a Hamilton that the “Boatman” comes on line w/ his take?
Most of us going after the PM market like tigers!
Why do you buy Gold?
Rule # 1: To buy and hold since the Fed has devalued the real dollar down to a nickle since 1913(that would be Ron Paul’s book)! It’s a long-term hedge against what Big Bank is going to do to you anyway! Rule #2: In a defaltionary market, it is a way to hold ON to your skin! It loses a whole lot less value than all other financial devices (`cept some) Rule #3: In a hyperinflationary market; gold let’s you feed your family after the silver is done…
And what scares me after we force ourselves off the cliff by irresponsible fear-mongering about the USA becoming insolvent, the belief in the the dollar sags and makes it happen; b/c all the parties involved lose their faith in the currency!
Hey! Learned a cool word in Latin the other day: “credere” – means to believe!!! That is where the word credit is derived from (LOL – hahahahahahahahaha!)
Oh dear!
TPC will probably clean this up A LOT.
But I wonder what Mish would say???
And I wonder where Steve Keen is going on this?
And Mosler is calling for a Euro @ $1.65? How, exactly? Spain is finally revealing her cards as we speak! Is the ECB that tough? I doubt it…
Both him and J Rogers have me confused….(although the Euro is truly depressed right now…)
rogers just playing the EUR dead cat bounce…..not that i would……and his 15 yr. EUR unwind wayyyyyy off.
5 stars to you lluv
“I am in an overwhelmingly small minority who believe a return to gold as a currency is nothing short of absurd”
You are kidding right? Can you name 3 economists in print who have suggested this as a possibility?
Not as a possiblity so much, but as a desire: 1) Ron Paul, 2) Murray Rothbard (yes I know, deceased) 3) Just about every hard core Austrian (not TPC) 4) I believe Mish Shedlock is as well.
I won’t buy silver and I won’t buy gold because they are barbaric when used as money. Copper sounds OK, though.
oh, this will be the 50 comment topic today………religon,politics,then gold…..oh, and MMT
i will try to restrain myself unless IB can put the heater down long enough to type at work.
lluvatar-put some hamiltons down on tiger not making the cut at pebble……..most of me wishes it wasn’t true.
Hahaha, nice zinger!
I’m thinking of investing in cigarettes. Seems that their relative value goes up in both good and bad times. I mean, you can’t argue with a product that has a large sized font stating it will kill you right on the wrapper – and yet people keep buying them up despite price increases in the 100s of %. Now if only I could find a way to store them without going stale..
Just jokes of course. Perhaps Johnny Walker Blue, Louis XIII, or McCallan 55 would be better choices – and guaranteed to increase in value over time!
already buried enough friends from those things,i guess i never understood em…..i got my bad habits tho……but i ain’t tellin you.
gotta get a laugh outta u somehow,afterall.
It’s all in good fun, boatman. I can definitely take a joke – and certainly dish them out as well. I take my job and my work very seriously – which can elevate stress levels quite high. You may actually find it surprising that the only time I smoke is during the working day. Then again, I don’t own a McMansion or a McMobile or wear a McRolex or even use any McMoney (this is the first time in my life I’ve ever held any debt and I’m only doing it so I can haggle my credit card company for a better rate). So at least I’m getting some things right.
But I have an offer for you. When the USD implodes and everyone turns into Morlocks and Eloys, you’re certainly invited to bring your yellow metal over to my place to enjoy some rare old cognac and/or scotch while we discuss which was a better investment. I bet my commodity investment tastes better than yours!
You know? You are beginning to sound German? In the Weimar period! Everyone shedding their money into durable goods as fast as they can. You are scaring me dude…
“but JP Morgan did a bit of time traveling back to the Great Depression to study the price action in silver (since gold prices were fixed)”
Gold prices were fixed? Really?
That jump in 1934 exactly mirrors the increase in the official fixed US gold redemption rate:
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