Bullish Sign For Gold: Falling Inflation

Posted on 9th November 2011 by Trevor Reynolds in Blog

Whilst many may argue that gold is  an inflation hedge and therefore inflation is bullish for gold, in reality the  dynamics at play here are not that simple.

In our view, a drop in inflation  would be a very bullish signal for gold prices.

In our view, gold is a currency. Therefore fluctuations in its price are largely based on its perceived value relative to other currencies. We would not suggest that its role as an inflation hedge is a primary reason for being long gold, since there are far more direct and efficient ways to hedge against inflation risk in this modern financial environment. We do however see currency devaluation as a primary reason to own gold. If one thought the Yen was going to strengthen against the dollar, then one would move USD holdings into JPY. If one thought the Yen was going to weaken against sterling, then one move JPY holdings into GBP. This environment is unique as across the world governments and central banks are trying to lower the value of their currencies. Therefore there is nowhere to go, except for gold which cannot be printed in an attempt to erode its value.

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