A lot of managers and academics have come to realize that gold is an imperfect hedge against inflation; a big change in understanding from the early '80's.
Now, some have swung too far the other way, believing that the constancy of gold's exchange value ("An ounce of gold would buy a good rack suit in 1935 [$35] and in 2007 [$900]") is based on its performance under deflation. And it is true that during the Great Depression gold was an appreciating asset. The thing is, gold was money and money in any form performs well under deflation. More after the jump.
From ZeroHedge:
Gas Price Drop Prompts Biggest Deflationary CPI Miss In 7 Months
Thanks, it seems, to the global economic slowdown driving energy prices lower, the Consumer Price Index just printed at -0.2% MoM, notably below expectations (its biggest miss in 7 months) and well down from last month's +0.7%. T
he main driver of this deflationary spike is the drop in gasoline prices -4.4% MoM. Year-over-year CPI (ex Food and Energy) lagged expectations also (1.9% vs 2.0% exp.) meeting the Fed's oh-so-well engineered mandates. However, the 1.9% rise is the slowest pace of inflation in 20 months. On the bright side, the price of used cars is rising at its fastest pace in months thanks to the 97-month term loans and government credit creation.
...MORE
See also:
March 21, 2013
Deflation as Far as the Eye Can See
March 26, 2013
"The Benefits of Chronic Deflation"
I've mentioned that after the mine closed in 2002 I traveled to the Homestake mine in Lead South Dakota to answer the question "Is gold an asset you want to own during deflation?" I was quite possibly the last person with access to the company records from the '30's. The skeleton staff that Barrick had in place for the shutdown were literally boxing documents for the archivists as I sat there. Here's part of what I wrote up:
....Gold is not a hedge against deflation. Over the years goldbugs have come to believe it is, based on the performance of Homestake Mining's stock during the Great Depression. Here's an example from Gold Eagle:Gold Stocks did well during the Great Crash and aftermath… indeed exceedingly well. Please note that from August through October 1929 Homestake Mining did decline in value, but no where near the percent plunge in the general stock market. And by yearend Homestake was again creeping up in price. For the first few months of 1930 the gold mining industry proxy was relatively flat. However, from mid-year on Homestake began to increase in value as the DOW and DJUA rapidly and relentlessly melted away. During the next five years the Gold Mining Industry's surrogate soared in value - while stock prices were decimated by the Great Depression.
It is relevant to observe that Homestake's price appreciation was not a market anomaly, but was consistent with its growing annual earnings per share and increasing cash dividend payout. Yearly E.P.S and cash Dividend payout data may be seen in the above Homestake chart. While nearly all industries revenues and earnings dwindled, the gold mining industry thrived. Homestake's E.P.S. increased from $4.19 in 1929 to $32.43 in 1935. During the six desolate years of the Great Depression, the gold mining industry's proxy enjoyed an E.P.S. growth rate of 41% COMPOUNDED ANNUALLY. Furthermore, while the banks paid a paltry 1% in "earned" interest on the meager savings of those few hapless souls who still had money, Homestake share holders were indeed enriching themselves. The 1929 cash dividend of $7.00 increased to a cash payout of $56 PER SHARE BY 1935. Consider for a moment the awesome investment significance of it....
...That is rather enthusiastic and more accurate than most analyses, at least he focuses on the equity rather than the metal. But the focus is still wrong.
There were three contributors to the move in the stock price:
1) A high-grading mining strategy proposed by a young engineer, Don McLaughlin in the late '20's began bearing fruit in the form of higher recoveries. Mr. McLaughlin went on to the presidency of the company.
2) A flight to safety after the October 1929 stock market crash.
3) The Gold Reserve Act of January 30, 1934 raised the price of gold 69%, from $20.67 to $35.00 (conversely devaluing the dollar by 41%).
3a) Homestake was thus paying salaries and other expenses in devalued dollars.
This combination of more gold produced, higher price per ounce and lowered expenses (in real terms) was what moved the stock, not some inherent magic in gold.
