Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Canadian Cannabis Stocks CRASH as Canopy Growth Hits a Dead End - 14th Dec 19
Retail Sector Isn’t Dead, and These 6% Dividend Paying Stocks Prove It - 14th Dec 19
Top 5 Ways to Add Value to Your Home - 14th Dec 19
Beware Gold Stocks Downside - 13th Dec 19
Fed Says No Interest Rate Hikes In 2020. What About Gold? - 13th Dec 19
The ABC’s of Fiat Money - 13th Dec 19
Why Jo Swinson and the Lib Dems LOST Seats General Election 2019 - Sheffiled Hallam Result - 13th Dec 19
UK General Election 2019 BBC Exit Poll Forecast Accuracy Analysis - 12th Dec 19
Technical Analysis Update: Tadawul All Share Index (TASI) - Saudi Arabia ETF (KSA) - 12th Dec 19
Silver Miners Pinpoint the Precious Metals’ Outlook - 12th Dec 19
How Google Has Become the Worlds Biggest Travel Company - 12th Dec 19
UK Election Seats Forecasts - Tories 326, Labour 241, SNP 40, Lib Dems 17 - 12th Dec 19
UK General Election 2019 Final Seats Per Party Forecast - 12th Dec 19
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

Gold Inflation Hedge Tripled During World Deflation Template

Commodities / Gold and Silver 2010 Nov 04, 2010 - 03:12 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleHow the one-trick "inflation hedge" more than trebled amid the modern world's template deflation...

LET'S IMAGINE the central bankers are right.


Let's say that – rather than actually ending a two-decade deflation – the price of clothing to Western consumers is only now set to turn lower.

Let's agree that the doubling of central-bank foreign reserves since 2005...plus the worst sub-zero real rates of interest since the mid-70s...will count for nothing in global energy or food prices.

Let's also say, despite all experience since the credit crunch bit in 2007, that the "output gap" theory – those "low rates of resource utilization" as the Fed put it on Wednesday – finally comes good, and so excess capacity conspires with slack demand to pull costs lower.

Let's imagine, in short, that money actually starts to gain value. What then?

Back in 2002, three years after Japanese consumer prices began falling and one year after the Bank of Japan first embarked on quantitative easing to try and reverse that trend, Tokyo's Economic & Industrial Policy Bureau organized a survey of consumer experiences. (A big thank-you to Atsuko Whitehouse of BullionVault Japan for this research, by the way...)

All told, 80% of respondents in 2002 said they felt some level of deflation in prices. A little over 25% felt deflation "very strongly", in fact. And only 1% said there had there been no deflation in their experience.

Yet gold prices in both the Tocom futures market and in Tokyo's Ginza shopping district had risen 37% regardless. That gave early buyers of the ultimate (and apparently one-trick) "inflation hedge" a better than 40% gain in real terms.

Sure, the price of gold globally had also been rising. And Japan's gold-friendly deflation came as the Yen fell on the forex market, extending the Dollar-price rise by 16% for Japanese buyers. But throughout its long, soft depression – and until 2009 – Japan was the world's second-largest economy, with the world's second-largest stock market. Thanks to Tokyo's swollen government spending since consumer prices peaked in 1998, it's since gone from the second-largest to No.1 bond market, too.

So we shouldn't dismiss Japan's experience as a mere footnote or outlier. It certainly suffered deflation in domestic risk-asset prices and credit supplies too, if not in the actual volume of money supplied to the economy. (As in the US and UK, base money grew fat and squatted on bank balance-sheets thanks to quantitative easing; it failed to pile new debt on top of the then-record total.) While government bonds rose in price, yielding just-about real returns thanks to those gently slipping consumer prices, the Nikkei index of stocks fell by more than a quarter. Real estate, having already lost one fifth over the previous decade nationally – and after more than halving in the 6 biggest cities – lost another fifth again.

The only major economy to hit deflation since before the Second World War, Japan thus offers our only template for what a modern deflation might look and smell like. Hence its obsessive hold on central-bank chiefs and would-be policy-makers (Ben Bernanke at the Fed, Adam Posen at the Bank of England, Paul Krugman everywhere). Hence BullionVault's quick survey of Japan's investment landscape since 1998. Because it looks remarkably like the ground opening up before US and UK investors tonight.

* Cash pays zip – ZIRP, in fact, thanks to the zero interest-rate policy pioneered (to no effect) by the Bank of Japan a decade ago;
* No bargain in stocks – the S&P might be very much cheaper from its price/earnings peak of 45 back in 2000, but it's still above 20, while Japan's stock market only now trades at 15 times earnings – an historical discount to be sure, but hardly a single-digit bargain;
* Flight into bonds – where Tokyo led, Washington and even Westminster now follow, issuing record volumes of debt at record-low yields to pension and insurance funds hungry for a "risk-free" zero return;
* Caution thwarted – forced to seek risk by miserable dividends and interest rates, otherwise cautious savers turned to high-yield bonds, emerging markets, currency trading, and precious metals investment.

"Domestic uncertainties spur Japanese investment," the World Gold Council's quarterly Gold Demand Trends reported at the close of 2001. Physical gold demand from private Japanese citizens then rose another 24% in 2002, swelling again in 2003 only to rise by 26% by physical volume in 2004.

That year, and for the second time since 2002, the Bank of Japan announced a cut in its ceiling for bank-deposit cover (equivalent to the FDIC), capping insurance at ¥10 million ($90,000). That really meant something, as the WGC noted, in a nation of "occasional bank failures" where "56% of household investments are held in bank accounts." Spooked by the fear of a truly deflationary uninsured bank failure, retail gold investment demand surged by 42% in tonnage terms in 2004, rising by nearly 50% by Yen value from 2003 to ¥103 billion ($1bn at the time). And right alongside, four years of ZIRP had forced a far greater quantity of Japan's famous cash-savings to seek better-than-zip elsewhere as well.

The initial period of Japanese deflation – marked by sinking interest rates and gently falling consumer prices – brought a series of mis-selling scandals in high-yield foreign bonds. Well, they were only scandals after Russia and then Argentina defaulted, of course. No-one much minded when they were paying (and the lesson went unlearned too, of course). Average daily volumes in the Tokyo foreign exchange market meantime rose 18% between 2003 and 2006 according to Bank of Japan data, but the Watanabes didn't really get hooked until the finance industry spotted the trend, and created retail-friendly products for leveraged currency speculation.

The Tokyo Financial Exchange, for instance, launched its Click365 forex platform in 2005...

Sound at all familiar? It isn't just gold bullion that catches a bid when the returns paid to cash fall to zero. And absent a sharp decline in consumer prices – rather than the low single-digit declines seen year-on-year in Japan over the last decade – it isn't just US consumers who might doubt the official cost-of-living data either.

A consumer survey run by the Bank of Japan found people felt inflation was running above 3.0% per year in Sept. 2009. After reporting a slight dip this spring, the 4,000 adults responding to Oct. 2010's survey pegged the true rate of consumer-price inflation at 1.3% per year...eating almost all of the 15-year Japanese government bond's current yield (5-year debt yields 0.3%) and delivering negative real-returns-to-cash almost as bad as those now suffered by US and UK savers.

To repeat – two things happen to gold investment when the returns paid to cash fall to zero:

* First, the missed interest that you'd otherwise earn holding cash-on-deposit vanishes. Gold still pays you nothing, of course, but neither does cash. So the opportunity cost of owning gold is removed;

* Second, and only slowly...over time...more and more people come to feel (if not realize) that putting cash in the bank guarantees a loss of real value. Because if inflation is 8.3% but interest rates are only 6.7% (United States, official CPI, winter 1973) – or if inflation is 1.5% but interest rates are zero (official US inflation, summer 2010; Bank of Japan consumer survey, last twelve months' average) – you can be sure your money will buy you less stuff one year from now. So you start seeking an alternative store. And gold's rarity, indestructibility and deep, liquid market make it the obvious choice, even though it still pays you nothing. Because at least it's not cash, which in a world of zero or sub-zero real rates must also be multiplying faster than gold miners can dig new ore out of the ground.

Anyway, thought experiment over. Because that brings us full circle...back to positive inflation and negative real rates...but with 600 billion extra dollars about to pumped into global asset and commodity prices by today's deflation-fearing Federal Reserve.

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules