How deflation could push up the price of gold

Most people see gold as a hedge against inflation. But a bout of ‘proper’ deflation could push it up too, says Merryn Somerset Webb.


The price of gold - it's not all about inflation, 'proper' deflation could push it up too

Most people think that holding gold is all about insuring yourself against inflation. Hold something that has always held its value over the long term even during hyper-inflation and you will have something to fall back on. And, of course, gold reached its record high in real terms back in the inflation spikes of the 1970s.

But as we have said before, holding gold is as much about protecting yourself from the unknown as from inflation itself. History shows that gold prices tend to go up in times of trouble whatever that trouble is.

As a note out from Capital Economics today points out, gold's amazing bull run from 2002 to 2007 took place against the background of generally very low inflation, so "other drivers can clearly dominate". Deflation could very easily be one of those drivers.

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That's partly because deflation (which, to be clear, we don't really have yet at all) means interest rates will stay lower for longer something that keeps the opportunity cost of holding gold very low (see my column on this from earlier in the week) while pushing up the odds of future inflation .

It's also partly because proper deflation in a high-debt environment "can cause substantial financial and economic strains". In the eurozone, a sharp rise in the real cost of debt servicing could even end up "fatal for the weaker economies."

Capital's final view with which we entirely agree is that "the wider implications of a lengthy period of deflation, even one triggered by a favourable shock such as cheaper oil, should strengthen rather than undermine the price of gold."

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.