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Deflation, American Style: Even Gold Not Immune to Downward Spiral

Posted Nov 21, 2008 07:00am EST by Aaron Task in Investing, Commodities, Recession

Less than six months after inflation fears gripped the nation, deflationary warning signs, or at least news reports about deflation, are seemingly everywhere.

Deflation is defined as a persistent decline in general price levels, typically accompanied by a severe contraction in employment and economic output. It's premature to declare deflation has arrived, if only because it's too soon to call this action "persistent."

John Roque, managing director and technical analyst at Natixis Bleichroeder, still believes inflation is a bigger threat because of the government's rampant borrowing and spending.

"They have to print money in order to get us out of here [and] inflation is a confluence of too much money chasing too few goods," he says. "Perhaps [inflation] happens later, but [many indicators] suggest it's not happening now."

For example, Roque recommends buying gold in the low $700s. But the precious metal has not been much of a "safe-haven" lately — despite rallying Thursday it's still down more than 27% from its summer high. Gold also didn't respond positively to news the U.S. mint was putting a freeze on gold coin sales amid record demand.

"We find it curious gold hasn't already risen a lot," Roque said, calling it is one of many signals pointing to at least disinflationary pressures, at least for the time being:

  • Declining asset prices, most notably (especially) stocks and real estate.
  • In October, CPI and PPI each suffered their biggest monthly declines on record.
  • Commodity prices, notably oil, have tumbled as the dollar has rallied, especially vs. the euro.
  • Treasury yields continue to fall and break-even spreads on 10-year Inflation-Protected Treasuries (TIPS) suggest the market is expecting just 0.25% annual inflation over next 10 years.
  • JPMorgan forecast the Fed will cut rates to zero in early 2009, and leave it there for much of the year (and nobody laughed).

127 Comments

Marston
Marston - Friday November 21, 2008 07:19AM EST

Gold price should rise when USA $ drops....for international investors.

Marston
Marston - Friday November 21, 2008 07:19AM EST

Gold price should rise when USA $ drops....for international investors.

Marston
Marston - Friday November 21, 2008 07:28AM EST

gold price should increase when USA $ weakens.....

__A_YAHOO_USER__
__A_YAHOO_USER__ - Friday November 21, 2008 07:30AM EST

Inflation, deplatiom it all the same be happy.....Wait and see.......What I never is evrery day the topic is all the same......I have the feeling that the Media is Bias to Bad news even this program......

__A_YAHOO_USER__
__A_YAHOO_USER__ - Friday November 21, 2008 07:34AM EST

All you see is bad not good time........

pawan
pawan - Friday November 21, 2008 07:40AM EST

pawan_pandher

bill
bill - Friday November 21, 2008 07:43AM EST

BANKS HAVE BEEN DUMPING THEIR GOLD HOLDINGS AT A RECORD PACE TO TRY TO RAISE AS MUCH CASH AS POSSIBLE. THIS LARGER THAN NORMAL VOLUME OF PHYSICAL GOLD FOR SALE HAS TEMPORARILY HELD THE MARKET PRICE DOWN,MUCH LIKE REAL ESTATE ! MARKET GLUT = LOWER SELLING PRICE....

Yahoo! Finance User
Yahoo! Finance User - Friday November 21, 2008 07:56AM EST

All of these opinions are based on a mistaken belief that we live in a democracy and that the major world players are gentlemen and women. This is simply delusional. The people in this country that cooked this up now have the American people AND the rest of the world by the balls. All of this black hole of cds debt is denominated in $$$, that's why gold is not going up and why the dollar is rallying. They really are weapons of mass financial destruction and because Hanky Panky and Bernanky control the dollar spiggot guess who gets to make up the rules???

CARLOS
CARLOS - Friday November 21, 2008 08:02AM EST

THE REASON OF THIS MESS IS BASED ON LACK OF LEADERSHIP WORLWIDE AND WE ARE VALIDATING THIS SITUATION SO WE GET WHAT WE BELEIVE. WE SHOULD CHANGE TO A NEW MEDIA OF POSITIVE NEWS AND POSITIVE THOUGHTS IN ORDER TO CREATE A NEW REALITIY

Yahoo! Finance User
Yahoo! Finance User - Friday November 21, 2008 08:02AM EST

$$SURFS UP !!!! Happy Friday Everybody !!

Roach
Roach - Friday November 21, 2008 08:07AM EST

I have never seen the likes of it, the American people are being robbed blind by the federal reserve and don't have a clue how to fix the problem. Here is a clue; the value of gold and silver doesn't change. Get rid of the federal reserve and demand the US Treasury print our money and all US dept will be gone. Get real people, what the FED is doing is liken to the mafia but only legal.

michael
michael - Friday November 21, 2008 08:15AM EST

What's that flushing sound? It's the American Economy. You can thank the Community Reinvestment Act and good old fashioned greed. Way to go lawmakers. Congress has had their head up their arses for decades and now the chicken is coming home to roost. Their head are so far up their own orpheus, they don't know how to get us out. Mistake after mistake. I have no confidence in Congress. No confidence in Bush and no confidence in Obama and ll his empty promises neither. It's these politicians that screwed it all up. Great Depression II, here we come.

Mobyware
Mobyware - Friday November 21, 2008 08:15AM EST

What do you people who voted for Obama expect!!! He is a Clinton puppet. All the social programs that Hillary wanted will be passed through Obama. The only problem I have is a sinking ship brings everyone down, not just the people who voted for SAME OLD DEMOCRAP crap. Tax and spend DOES NOT WORK!!! I guess nobody bothered to ask Obama what he meant by change. CHANGE TO WHAT?

cw
cw - Friday November 21, 2008 08:25AM EST

Who is John Galt?

Mav V
Mav V - Friday November 21, 2008 08:27AM EST

Watch Ron Paul grill Bernanke on Nov. 18. Paul asks him about his discussions and listen very carefully at the end to what Bernanke says about gold. Then ask youself if the US government could possibly be manipulating the gold market by selling gold reserves to prop up the dollar. - Roque's comments: Gold also didn't respond positively to news the U.S. mint was putting a freeze on gold coin sales amid record demand."We find it curious gold hasn't already risen a lot," Why?

JARAA
JARAA - Friday November 21, 2008 08:29AM EST

.. "This is total market MANIPULATION in order to convince the public that they should not buy gold or silver with their fiat currency. The "spot" price of precious metals is no longer the actual spot price. ..." etc. Agree 100% Gold is holding well enough. Ok everyone thinks its deflation. Inflation is gonna come fast, hard and destructive,

George
George - Friday November 21, 2008 08:32AM EST

At the end of World War II, Hitler blamed the German people for his failure. The inablity of people to accept any blame on their on part or to stop parroting the same old tired slogans worrries me deeply.

Orman
Orman - Friday November 21, 2008 08:35AM EST

How long will the American people let our supposed government continue to bail out their friends? These people have run their respective companies into the ground and then get bailed out by their buddies in positions of authority within our government, to include the President. Why doesn't congress just give all of us legitimate tax payers $500,000 a piece and let us save our own homes?!!!!!!!

__A_YAHOO_USER__
__A_YAHOO_USER__ - Friday November 21, 2008 08:36AM EST

Why worry about deplation......Who is afraid of Deplation....I said I am happy no matter what.....Having heared about deplation,there is a pages of pages on the news paper about it,News after news about deplation...Having heare of Falling Price......If my Income from my pay packet still the same...Which means my spendable Income will rise and getting stronger.....My purchasing power of my wages getting stronger and wider due to deplation...Lower price strong spending power....In other word I can buy more provided my wages will be the same....Is that a good news or bad....I think that is good....Income with a lower price means you are using impeccable economics..Lower price....Nothing to be afraid folks....Work hard earn more and had a wages,you pay pocket will buy more......Wy because the price is coming down...That is deplation....Be happy and stay at your jobs......Good luck and do not be afraid of Deplation......It is garbage.....

silverfox
silverfox - Friday November 21, 2008 08:37AM EST

I think once we get over this recession, we should go back on 'gold standard' - dollar backed by physical gold. That will make us strong, and will make the Congress think twice before they spend our money away.

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