The Impact of Inflation and Deflation on Gold

Our friend Stephen Flood's GoldCore.com writes on July 6, 2012:

WGC – The Impact of Inflation and Deflation on the Case for Gold
Following yesterday’s WGC reports about the role of gold in investment portfolios, this report looks at gold’s performance during inflationary and deflationary times. Gold, non-perishable and limited in supply, is seen as relatively immune to inflation, financial crises and credit default. Topically, periods of negative real interest rates are thought to support the demand for gold, because the opportunity cost of holding gold decreases when real interest rates fall. Weak dollar has also been seen to drive up the price of gold.

Real gold price

The report concludes that gold may perform especially strongly when inflation is high, the dollar is weak, and there are elevated levels of financial stress, highlighting the role of gold as risk insurance in a balanced portfolio. There have been several recent inflationary periods in the world, but periods of general deflation have been rare. Nonetheless, the report suggests that in deflationary times, gold’s demand as a store of value increases even when the demand for commodities that are industrial demand-driven is likely to fall.

US dollar exchange rate and gold

The full report is available here.

July 6, 2012 (Source: GoldCore)

http://www.goldcore.com/goldcore_blog/impact-inflation-and-deflation-gold