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Strategies & Market Trends : Moufassa's Lair -- Ignore unavailable to you. Want to Upgrade?

To: Condor who wrote (10520)	11/13/2002 10:35:36 AM
From: Trumptown	Respond to of 13660

Here's another interesting piece(written over 6 years ago)as we are more likely to in a deflationary mode: Message 18227629 The Behavior of Gold Under Deflation The behavior of gold under deflation has received little serious study in recent years. As most investors consider gold a hedge against inflation, many extrapolate that since gold performed poorly under the 1980s disinflation: surely it must do even worse if we actually experienced an outright deflation. As we have discovered through a detailed review, the conventional wisdom ignores the lessons from history. It is the impact of deteriorating economic activity on credit quality - not whether we operate under a fixed or floating rate exchange system - which is the operative factor driving gold’s behavior under deflation. Executive Summary · Deflation is defined as falling levels of both economic activity and falling price levels on an absolute basis. The contraction of economic activity is generally preceded by an unsustainable boom period and is usually kicked off by an event which causes economic confidence to be lost. Deteriorating credit quality, the shift from capital growth to capital preservation, and the hoarding of capital are characteristics of most deflationary periods. Deflations typically end after crisis conditions force policymakers to enact large-scale inflationary policies designed to counteract deflationary conditions. · In historic US deflations, individuals had the choice between paper currency or gold as hoarding vehicles. The historical record demonstrates that loss of confidence in the issuer of paper currency is often a sufficient reason for individuals to choose gold over paper currency. We attach a detailed review of the behavior of gold under each US deflationary period since the Post-Jacksonian deflation of 1837- 1843. · In a prospective deflation, the existence of large foreign exchange reserves and a historic accumulation of financial assets means the magnitude of capital flowing to hoarding vehicles is large. With a limited pool of hoarding vehicles in today’s marketplace, prices of scarce hoarding vehicles would be bid up. · Compared to widely available cash-substitutes, gold’s relative attractiveness boils down to relative credit quality. Competing against foreign currencies, the role of gold as a preferred hoarding vehicle will depend if deflation is limited to the US or spreads internationally. Under the global deflation scenario, foreign currencies would also be negatively impacted by deteriorating credit quality. · Because of cultural conditioning, Americans may ignore gold as a currency alternative in the early stages of deflation. Considering the importance of Asian investors to gold demand and the favorable cultural conditioning Asian cultures have towards gold, this may be a mistake. Asian investors may gravitate towards gold much earlier in a deflationary spiral, leaving American investors behind. SUN VALLEY GOLD COMPANY March 1996 Sam Hewitt, Ph.D., CFA