How Do Inflation & Deflation Each Affect Precious Metals?

deflation, inflation, goldQ: Should I buy, sell, or hold during times of inflation or deflation?

A: The inflation/deflation argument is almost a moot point, because regardless of whether we have a high inflation or hyperinflation or a deflationary environment, the purchasing power of precious metals is almost certain to rise.

The reason for this is more about psychology. When people feel uncertain about their future, due to war, strife, or political chaos, they move assets to a place that is reliable and safe. For most of the previous century, this safe harbor was U.S. dollars and treasuries. As the dollar and all currencies lose purchasing power in today’s economy and treasuries are at near-zero interest, more and more investors are turning to the historical safety of precious metals.

When the economy and the world seem stable, gold and silver are less interesting and tend to sit idly by without much change in purchasing power, because people aren’t worried. In an inflationary environment, the dollar, the yen, and the euro all lose value as more and more are printed. Meanwhile, gold and silver rise in value and purchasing power.

If the dollar loses 10% of its value, gold and silver aren’t necessarily going to go up 10%. In all likelihood they will rise even further than that, due to the emotion of the market. Fear and greed drive markets to irrational levels until the market corrects. In an inflationary environment, gold and silver are a great choice.

In a deflationary environment, people are scared and they tend to turn to assets that are stable. Gold and silver are going to maintain a strong purchasing power as the price of commodities collapses in terms of currency.

It doesn’t really matter whether we have an inflationary or deflationary environment. Either is going to result in gold and silver becoming more valuable, either in terms of both price and purchasing power (in an inflationary environment) or in terms of purchasing power alone (in a deflationary environment).