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Heimdhal
5th April 2010, 08:50 AM
We all know, or at least understand the basic premis behind, Gold and Silvers role in an inflationary economy. But the question remaisn, what if we go the other way.....


Discuss: ;)

foolsgold
5th April 2010, 09:00 AM
My two cents. During deflation the standard advice is be in cash(money). Since gold is money (where have I heard that before) I am perfectly comfortable being in gold and silver, which is readily convertable to FRN's if need be.
During the crisis in 2008 gold did well compared to other financial instruments, but treasuries and the US dollar went ballistic. I do not expect a repeat of that senario if we have a double dip resession, people are already talking about gold as a secondary reserve currency and the 10 year bond tield is 3.99% as I write this. People seeking a safe haven will not run to treasuries again.

Steal
5th April 2010, 09:04 AM
Gold will still do as it is suppose to in a deflationairy environment. Silver not as much. Take away or even just reduce all the manipulation that goes on in the metals and I could care less what type of environment we are in, they both are gonna go ballistic.

Uncle Salty
5th April 2010, 11:17 AM
Gold and silver will do well in a deflationary environment because there is no counter party risk.

Sure, there will be a contraction in the money supply, but there will be a greater contraction in the financial assets. Paper investments will implode due to counter party risk. So while the money supply shrinks, more dollars will chase gold and silver as they will be true stores of value compared to other assets.

Ponce
5th April 2010, 02:06 PM
At first cash paper will rule because that's what 98% of people have and understand but as time goes by and they see the little that they can buy with cash paper........and then coins will come into the act.

As time goes by people will deal with pm, silver more than gold because not many will have change for a gold coin if you were to buy three chicken......better with a silver round.

If in the past someone bought a bicycle for $500.00 he will try and sell it for $125.00 but in reality his final sale price (on paper) is of $65.00 because of the value of the dollar.

Remember "Soylent Green?" where a jar of jam cost $178.00?... if they were to pay in silver then the original price of the jar would be the same of $2.50.

peachesinfla
10th April 2010, 12:28 PM
You guys may turn out to be right but all I have read indicates that Gold retains its purchasing power while Silver will go into the crapper. Gold over Silver in a deflationary environment. This time around this might not be the case. No one really knows.

gunDriller
10th April 2010, 02:12 PM
Gold and silver will do well in a deflationary environment because there is no counter party risk.

Sure, there will be a contraction in the money supply, but there will be a greater contraction in the financial assets. Paper investments will implode due to counter party risk. So while the money supply shrinks, more dollars will chase gold and silver as they will be true stores of value compared to other assets.


Jeez man exactly. 8)

Trinity
10th April 2010, 07:09 PM
Sure, there will be a contraction in the money supply,


The M1 money supply is not contracting, yes M2 and M3 are I agree. But I say the money supply us metal heads should be looking at more closely are Asian money supply levels plus Australia.

mamboni
11th April 2010, 08:06 PM
How Might Gold, Silver and T-bonds
Behave in a Bear Market?
Can precious metals and U.S. Treasury bonds
fall together? You bet.

by Editorial Staff, Elliott Wave International | April 9, 2010
Print
Enjoy this excerpt from Elliott Wave International's free Club EWI resource, Independent Investor eBook (Now With 6 New Chapters!). Please see details on how to read the entire eBook below.

Gold, Silver and T-bonds
(Robert Prechter, February 2009)

This section will offer a novel viewpoint. Can you imagine a scenario under which precious metal and Treasury bond prices would fall together? Most people would think such an event would be impossible. After all, as we showed in our study of March 2008, bonds do well during deflationary recessions, and gold goes up during inflationary booms. Shouldn’t they be contra-cyclical?

Look at Figure 3 and realize that gold and T-bonds have been going up together for an entire decade.



This is completely normal behavior according to our liquidity theory of market movement at the end of credit bubbles and their aftermath, as proposed in Conquer the Crash back in 2002. If gold and T-bonds can go up together for ten years, they certainly can go down together as well.

[Here is a scenario that] is likely to occur later, but since it could happen now, let’s review it. ...U.S. Treasuries cannot hold up forever, particularly given the drunken-sailor approach to fiscal management that Congress has practiced over the past century and which has accelerated madly in the past eight years and even more outrageously since last September. At some point, Uncle Sam’s credit rating will begin to slip. According to the price of credit-default swaps on U.S. Treasury debt, it is already slipping.

When the monopoly issuing agent of dollar-denominated debt -- the Federal government -- begins to lose credibility as a debtor, the U.S.’s great experiment in fiat money will end. Read it here first: The U.S. government is the borrower of last resort. When it can’t borrow any more, the game will be up, because the government’s T-bonds are the basis of our “monetary” “system.”

What will happen when creditors begin to smell default? They will demand more interest. At first, it might not be much: 4%, 6%. But as the depression spreads, spending accelerates, deficits climb and tax receipts fall, the rate that creditors demand might soar to 10, 20, 40 or even 80%. In 1998, annual bond yields in Russia reached over 200% before the government finally threw in the towel and defaulted.

Prices of outstanding bonds, of course, collapse when yields surge. As rates rise, many people will sell other investments to lend at these “attractive” rates. In such a situation, T-bonds would be the primary engine of falling prices, as they suck value from other investments. So, this is another way that gold and bond prices can go down at the same time. ...

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Book
11th April 2010, 08:42 PM
...but all I have read indicates that Gold retains its purchasing power while Silver will go into the crapper...


http://clarusprocessing.com/yahoo_site_admin/assets/images/Checkout_Counter_black_guy.287153853_std.jpg

Yep...nobody at the grocery store will be taking the time to read the date on your "silver" dime wtshtf. Try talking the clerk into giving you more then ten cents for it now...today...when things are calm and the grocery store isn't being looted.

I do agree about gold and possess AGEs...

:)

1970 Silver Art
12th April 2010, 03:51 AM
Maybe I am wrong on this but I would think that in a deflationary economy, cash would be king. Everything else would go down in price (in theory) in a deflationary economy. Gold and Silver are still good to have in a deflationary economy because I would think that in a deflation economy, the gov't is going to eventually pull out all of the stops to get the economy going and that means more $ printing and $ printing would mean that more dollars are chasing the same amount of goods produced and therefore creating price inflation. The price inflation (in theory) would make the gold and silver prices as well as other goods and services go up.

Neuro
12th April 2010, 11:27 AM
Gold held up remarkably well in 2008, especially physical gold, paper silver was a disaster as it went down to 8.50, but physical silver hardly ever went down below 11.50 unless you could find 1.000 ounce bars... Not exactly stellar performance, but not worse than stocks... This time we will not see Treasury flight to safety... I start having doubts about another bout of deflation... China had the first month in 60 or so of Trade deficit, that tells me they really don't want to hold paper...