The Morgan Report Blog

What happens to gold during a deflation?

Of course, many of my readers are equally if not more interested in what happens to silver in a deflation as well.

The views on this topic vary. Some insist that both metals will do well under almost any economic conditions; some, like Bob Prechter, think neither gold nor silver will do well; and others, believe gold and gold alone will be the only thing left standing.

Confused? You should be…

In all matters such as these, studying the past can be beneficial, but — as you have read so many times before — knowing the past is not a guarantee of future results. Personally, I like to let the market speak, and for many years I have forecast that a day would come when the price of the physical gold and silver market would separate from the price “set” in New York or London. Alas, this is the case when looking at the retail market versus the commercial market.

Let us venture in the past when it looked like deflation was going to reign at the bottom of the financial crisis in late 2008. Silver actually traded below $9.00 for a brief time.

At that time,  Jason Hommel of Silver Stock Report stated:


The price manipulation at the COMEX has been so  severe in the past, that it has created a profit incentive to create a free market in silver, through an arbitrage between the physical silver market and the paper price as set by the Comex a profit opportunity exists by buying in one, and selling to the other.”

Readers might recall I wrote an article titled Silver Arbitrage, back in August.


What we can take from this past history is that those that were savvy enough to see an opportunity and took advantage of it. This writer bought commercial bars and later sent those bars to a mint to have the bulk silver converted into silver rounds.

Looking at the Opinions

Dr. Marc Faber one of the most respected and best followed in the industry has stated his opinion on the deflation debate as follows–“Therefore, under both scenarios — stagflation or deflationary recession — gold, gold equities, and other precious metals should continue to perform better than financial assets.” See article here.


Again going back into the distant past we might glean something …

Castrese Tipaldi wrote on, “I don’t know if in the last week we saw the last gasp of those usual subjects trying to cap gold, and I don’t know if we now have the very last possibility to get silver at a price so cheap.” What makes this quote so interesting to me is he wrote this on April 20, 2004. See article here.


Steve Saville of the Speculative Investor writes, “The most important difference between then (the 1930s) and now is that gold and cash US Dollars were interchangeable during the early 1930s (the deflationary period) by virtue of the fact that the Dollar was defined as a fixed weight of gold. A typical effect of deflation is an increase in the purchasing power of cash. The fact that gold and cash were officially linked during the 1930s meant the deflation caused the purchasing power of gold to increase along with the purchasing power of cash. In other words, under the monetary system that was in effect during the 1930s gold was a hedge against deflation. Furthermore, under such a system the purchasing power of gold would decrease during periods of inflation; that is, when the dollar was defined in terms of gold, it would have made sense to shift investment away from gold during periods of inflation.”

Adam Hamilton of Zeal LLC wrote, “Anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. Conversely, anything not typically ‘paid for’ with debt, including groceries and general living expenses, is almost certain to rise in the coming years. We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes.” See entire article here.


One of my favorites is from Dan Ascani, who wrote essentially about Professor Jastram’s very long-term study on gold, and he essentially states that Jastram studied four pronounced price deflations taking place. In all four deflations, operational wealth in the form of gold appreciated handsomely. When one sees that just by holding gold for 13 years, from 1920 to 1933 operational wealth would have increased 2½ times, one realizes that gold can be a valuable hedge in deflation — however, a poor one in inflation.

Several years ago my entire presentation in The Morgan Report was on the topic of silver and gold during a deflation. In fact this writer is fond of quoting Professor Jastram in both of his books. The Golden Constant which looked at gold during both inflations and deflations, and Silver the Restless Metal which was a similar study for silver. Currently it seems the physical markets are taking control, yet the clues are still subtle, nonetheless with Hugo Chavez asking for Venezuela’s gold to be returned we must ask is this the tipping point in the physical gold market that is the start of a trend?

Gary North states, “There are a few contrarians who think that deflation is coming: both monetary deflation and price deflation. As far as I know, there are only about a dozen of them who write newsletters or run websites. For some reason, most of the deflationists seem to think that gold’s price will rise in a mass deflation. They do not warn their subscribers, ‘Don’t buy gold or silver!’ If they did, they would have fewer subscribers.” See entire article here.


Bob Prechter has written much on the topic; his overview of defining Inflation and Deflation can be found here.


Further, Bob goes on and states that neither gold nor silver will do well in the deflation he had predicted for so long. Specifically, “I’ll cut right to the chase: Unless you’re about 80 years old, the United States economy is undergoing the worst downturn in living memory. Every measure of growth is grim. The world’s most recognized stock index — the Dow Jones Industrial Average — is down 30% from its October 2007 all-time high.

“If ever there was a time for the ‘Safe-Haven’ lure of precious metals to surface — now, yesterday, even seven months ago when the Bear Stearns’ bailout launched the historic reshaping of Wall Street — would have been it. Yet, from its March 17 record peak, GOLD prices have plummeted more than 20%.”

So much has happened since Bear Sterns and Lehman Brothers that it might take volumes to go into it all, let’s simply request that you ask yourself if the financial conditions has gotten better or worse since then?

You can read many varying views on what will happen to gold and/or silver under a deflation. Right now the financial marketplace is so unstable that it is difficult to put too much faith in anyone’s opinion based upon such a short snapshot. Doug Casey has repeated often that the metals, and particularly gold, are a CRISIS HEDGE. I think this is the way to look at the situation.

We have already has the financial “crisis” of 2008 and even the mainstream refers to the massive sell-off as a crisis. Since then both gold has made a new nominal high and silver got very close to its old nominal high of $50.00

The question again for you is…

Has all the stimulus and government/political interventions worked or not?

Be thoughtful in your answer your financial future may well rest upon your action or inaction. 

David Morgan

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