IS DEFLATION A RISK?

shutterstock_240709591With all the recent talk of the possibility of inflation bottoming in the U.S., we felt it prudent to discuss the other side of the coin a bit. Deflation is a decline in the general price levels of goods and services. An economy is said to be experiencing deflation when the inflation rate falls below zero percent. A CPI reading of -.1 percent, for example, would indicate that prices have dropped as much. The U.K. has just apparently entered deflation with year-over-year consumer prices falling .1 percent. Why is this important? We have talked extensively about inflation, and how gold may potentially act as a hedge against rising prices and a loss of purchasing power. It is important to realize, however, that gold may also act as a hedge against deflation. While we are in the U.S. and not the U.K., one has to wonder if falling prices elsewhere could potentially be indicative of deflationary pressures creeping up here. Could this be the beginning of a deflationary trend? Time will tell… Deflation can cause a significant amount of problems. Debts can become harder to pay off, economic activity can suffer and the whole cycle can become self-perpetuating. The Fed has worked hard to stoke inflation in recent years through quantitative easing, low interest rates and other measures. Thus far, however, inflation remains benign… While deflation may or may not take hold and spread, we feel that gold can provide a degree of protection from deflationary forces. It’s no secret that gold may be sought after during times of geopolitical, economic or other turmoil. Considered by many to be a safe haven asset, gold could stand to benefit greatly if deflation were to take hold. Consider this: The Fed has not been able to ignite inflation, and in fact any pressures remain elusive. The rally in the dollar index in recent months has added pressure to prices here in the U.S., and the economy is closer to entering a deflationary cycle than at any time in recent decades… Should the economy enter such a deflationary cycle, it could be an economic bust. Falling wages, revenues and asset prices could potentially derail any economic recovery. We have already seen the effects of what falling prices can do. Simply look at the crude oil market in recent months. As the price of oil has steadily declined, energy companies have seen billions of market value erased, projects have been shuttered or scrapped altogether, and unemployment has been rising in areas such as Texas, where oil plays a significant role in the state economy. Now imagine for a moment that it’s not just oil prices falling, but other forms of energy, base metals, food and others… Not a pretty picture is it… Gold prices have fallen from their QE high of $1900 an ounce in 2011, and currently sit just above the $1200 level. We could make the argument that downside seen in gold in recent years is a function of two factors:

  • Gold has been in a long-term uptrend and was due for a correction-pure and simple. Markets do not typically go straight up or straight down, and the gold market is no exception. What has been seen in recent years may prove to be nothing more than a pullback, and could represent one of the best opportunities to buy gold in history.
  • Gold falling from its 2011 highs may also simply be a function of the “inflation” trade being unwound. Many investors bought into the yellow metal as the fed expanded its balance sheet and fought the economic slowdown. The problem is-inflation never appeared. This lack of inflation may have caused investors to bail on the precious metal. While many have been told to buy gold as an inflationary hedge, it is likely that few have been told to buy gold as a hedge against deflation.

Gold can, however, provide just as much value-perhaps more-during a deflationary cycle. The time to act is now… With inflation levels remaining significantly below target levels, and deflation appearing elsewhere, the time to take steps is now. Gold may protect purchasing power during deflation. In past deflationary cycles, gold has increased in purchasing power. This may help counteract falling prices among other asset classes. Gold may also be bought as a safe haven asset should deflation set in and economic turmoil increase. Gold may simply resume its long-term trend-which is higher prices… The time to act is now. One of the simplest ways to gain exposure to these critical precious metals is through a precious metals IRA. Getting started with a gold IRA is easy. Our experienced executives are here to guide you, step by step, through the entire process. Call us today at 1-800-341-8584 FREE FREE to get started.

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