Merryn's Blog

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.


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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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 .

Advertisement - Article continues below

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."




How and where to buy gold coins and bars

We have compiled a directory of leading gold brokers where you can buy gold bullion, coins and bars online, over the phone or even in branch. New t…
14 Jan 2020

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular


Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020