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Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?

Courtesy of Mish

Wage and CPI inflation, even core inflation, has surprised to the downside four consecutive months. If a recession hits, and that is just a matter of time, outright price deflation is likely.

Via email, Albert Edwards of Societe Generale discusses the subject in Global Strategy Weekly.

US core CPI and wage inflation have surprised on the downside for four successive months. Usually only two data points are sufficient for most of us to be able to draw a trend, but four data points surely provide clear evidence of the decisive re-emergence of a deflationary trend. At the very least this recent data is grounds for a dismissal of the argument that ‘end of cycle’ inflationary pressures might make a brief appearance before the long-term deflationary secular trend reasserts itself in the next downturn.

If inflationary pressures are indeed ebbing in the US economy, this begs the question that if the third-longest cycle in US history cannot produce a cyclical uplift in wages and prices, what on earth will happen in the next recession! Investors might give some thought to the fact that we are now just one recession away from Japanese-style outright deflation!

The US is not alone, however. The ever topical Gerard Minack shows in the chart above that although the number of OECD countries in absolute deflation at the core CPI level has receded, those undershooting a typical core CPI target of 2% are at an all-time high. This is quite amazing given where we are in the global economic cycle.

What’s That Mean for Gold?

Contrary to popular belief, gold is not an inflation hedge. We had inflation every step of the way from 1980 to 2000 with gold falling from $850 to $250 along the way.

To be more precise, we had disinflation, a falling, but positive rate of inflation as measured by the CPI. Those are conditions in which gold tends to perform miserably.

Gold tends to do well in deflation, stagflation, and times of credit stress. More importantly, gold does well when confidence in central banks is on the wane.

On June 24, I gave a presentation to the Venture Alliance group. Here are a few slides on gold from my presentation.

Continue reading here…


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