Gold and Deflation

Frank Holmes - Gold and Deflation

 Frank Holmes

CEO and chief investment officer

U.S. Global Investors

I have been speaking and writing about gold’s appeal in a deflationary environment – this is a concept that opposes the conventional opinion that the gold price will not rise without inflation.

Those who cling to that singular gold-inflation relationship have not examined the history of gold as money. Whenever there is substantial inflation or deflation, governments tend to either be too slow to react or they overreact with policies, and this is typically good for gold.

Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.

During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy. This also supports gold as safe money in addition to its beauty as jewelry.