Deflation and Economic Weakness Are the Best Catalysts for Gold

Before It's News
Contributed by The Daily Gold (Reporter)
Wednesday, May 19, 2010 10:11
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Recently, I had written about how a deflationary impulse in the capital markets would be a catalyst for the gold stocks. This turned out to be accurate as stocks and commodities weakened while treasuries and the US Dollar advanced. Gold and gold stocks also moved higher. Nevermind the comments I received about how we are in an inflationary period and Gold will go down in a deflationary period.

The typical mainstream view is that for Gold to do well reflation needs to take hold. Banks need to lend and velocity of money needs to pickup. Gold can’t do well if assets are declining. This is what many were saying back at the end of 2008.

Fast forward 18 months and Gold has soared to a new all time high with Silver and the gold stocks close behind. Stocks and commodities have gained but only marginally. The US Dollar is about flat. Bank lending and consumer credit continues to decline. Why are the precious metals performing so well?

Deflationary forces can weaken an economy severely and in turn, exacerbate government finances. This is how a sovereign debt crisis becomes a currency crisis. We have deflationary forces in the US, Europe, the UK and Japan. Yet, unlike ten or twenty years ago, governments are in a terrible fiscal situation. Hence, the market sees this and sees that currency depreciation is inevitable no matter if a government defaults or hyperinflates. In smaller and weaker countries, this scenario can play out in weeks or months. For the western world, it will play out slowly over a span of years.

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