Gold In A Deflationary Economy - Part- VII

The American Experience
Period 4:Deflation of 1920-1933

Duration: 13 years
Commodity Prices: -69%
Purchasing Power of Gold: +251%
Monetary System: Gold Exchange Standard

England suffered more during the first part of this period than the United States, which experienced severe deflation and associated problems from 1929-1933.

Europe had crashed in 1920, and between 1920 and 1933 prices deflated at the highest annual rate in British history for any substantial period of time15. The Jastram Index of Gold Prices had remained constant within one decimal point for 90 years, then between 1918 and 1920 it soared 33%, setting up collapse that followed. In fact, I note here that years of historical study show a strong likelihood that the excesses of monetary policy that develop during the long cycle of 55-60 years or so (the Kondratieff Cycle-see page 14) typically sees a repeating scenario in which gold and commodity prices soar when the Kondratieff Long Wave Cycle is due to peak (i.e., 1920, 1980), then severe deflation beginning a few years after that peak, ending with commodity price cycle lows just ahead of its end, occur.

Commodity and gold price lows very typically occur when the extreme ramifications of an entire economy collapsing in debt default reach their climax throughout that economy. The most recent cycle of debt repudiation, on which the Kondratieff is based, began to accelerate in Asia in 1997 with that region's collapsing debt pyramid.

Gold shares began to appreciate in 1930, with gold and silver beginning a robust advance in 1933. All provided vehicles with which investors could prosper during times of deflation and depression.

Note several patterns of behavior in investment vehicles during this historic period. First, the U.S. and England remained on the gold standard throughout the period but note that spot gold and spot silver prices bottomed in the midst of the Great Depression and appreciated. Gold more than doubled in value from $20.67 to $44 (+113%) per ounce in the spot market between 1933 and 1946, but notable is the fact that it increased 70% during the most difficult years of the depression between 1933 and 1935. Silver increased a whopping 193% between 1933 and 1935 and then again 159% between 1942 and 1946, for a total price appreciation of 254% between 1933 and 1946. This same type of behavior during any deflation of the present cycle would present an extra opportunity for investors since this generation of investors is allowed to own gold, and it fluctuates in the free market. Even a return to the gold standard now would likely be accompanied by a policy different than the types of pre-1971 gold standards in that the powers that be today will likely maintain a standard accompanied by a freely fluctuating gold price (more on this later), allowing investors to capitalize on any appreciation during troubled economic years.

Gold shares soared from 1930 until 1935, bucking the 80% collapse in the general stock market

Second, gold shares began to appreciate in value before the bottom in gold and commodity prices in 1933, and as soon as the general stock market had completed its post 1929 crash rebound in 1930 (just ahead of the Dow's 80% collapse into its 1932 low). The U.K. Gold Share Index, for example, appreciated 230% from 1930 to 1935. By contrast, the Dow Jones Industrial Average lost 86% of its value between its 1930 peak and 1932, and lost a net 67% in value during the time between 1930 and 1935 that saw the gold share index soar 230%. Although each deflationary economic contraction has its own individual characteristics, this historical tendency, combined with the real fundamentals that power investment markets during times of deflation (as opposed to the most common perceived direction of investment markets as held by a largely misinformed general public), comprise some of the reasons The Global Market Strategist has been recommending that investors reallocate portions of their portfolios while the going is still good in the general stock market (see also recommendations section of this report).

Partly for reasons given in this report as to their increasing profitability during deflation (see the conclusions section of this report for more), gold shares, then, offer investors the first opportunity to participate in the diverging investment markets during the very early years of deflation-even before associated crises occur. Gold and silver, of course, also offer those opportunities.

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All Rights Reserved.

Spot gold and silver bottomed in the midst of the Depression and then more than doubled in value).

Dan Ascani President,
Global Market Strategists, Inc.
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