Charles Gave On Gold As A ‘Deflation’ Hedge

Tyler Durden's picture

From Charles Gave of GaveKal

Gold As A ‘Deflation’ Hedge

Economists have had many market puzzles to ponder in this era of monetary excess, going back to Alan Greenspan’s long bond “conundrum” nearly a decade ago. The latest market conundrum is gold: why did it begin rallying on news that US liquidity growth would be slowing (the taper), and why has it remained strong despite weak global CPI prints and flagging broad money growth the world over. This is particularly hard to understand for Organization for Economic Co-operation and Development investors, who think of gold as an inflation hedge. But it is less counterintuitive for the emerging markets.

To explain, let us for simplicity’s sake divide the world into two categories: 1) those countries which have foreign exchange controls; and 2) those which do not. The first category will be comprised mostly of emerging economies, the second mostly of developed economies.

If you are a rich person in one of the countries with capital-account restrictions, it can be difficult to diversify your assets abroad. In quite a few of these countries, even if one cannot for example buy a US government bond, one can buy gold, often produced locally. So gold becomes the substitute for international assets in a diversified portfolio.

Since the monetary history of quite a few of these countries is checkered at best (hyperinflation, defaults, taxes on capital flows, devaluations, etc), gold becomes the best available hedge against bad policy, as well as against a bear market in the local stock market. And it works—see the chart of Brazil as an example.

Of course, emerging markets are often as vulnerable to the vicissitudes of foreign capital flows as they are to domestic policy. Fed policy risk offers another motive for gold-hoarding in emerging markets (EM). If US monetary policy adds to the volatility of EM exchange rates, then residents need to hedge against this—and, as mentioned, their hedging options are limited. This is how we get the bizarre situation where holding gold protects against devaluation and growth/deflationary pressures in the emerging markets.

Gold will keep rising as long as US policy is exporting volatility—we see no imminent change in this situation under Janet Yellen’s Federal Reserve.

As the French economist Frederic Bastiat told us long ago, with any economic policy, there is what we see, and what we don’t see. The markets are looking for the effects of Fed policy in key US data points, like the employment figures. Yet the exchange rates of economies that now make up a significant portion of the global growth pie—Brazil, Indonesia,  India, China, etc—are also quite relevant to the future of the financial markets in the developed world.

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HedgeAccordingly's picture

the purchase of WhatsApp is as good a inflation indicator as many need.. for the moment at least .

Pool Shark's picture



Coincidentally, Mish explained this exactly 7 years ago:

Summary: Gold is a better deflation hedge than an inflation hedge. This is because Gold is Money, and Money always does well during deflations.


Soul Glow's picture

Mish explained that?  I dare say I can't believe it.

Doña K's picture

It depends of where you stand as explained by the article. The fear of soft currency holders is mostly devaluation of currency rather than deflation. If you were to combine the sum of the world money seeking cover for deflation and currency devaluation as well as fears of inflation in some other countries against world money holdings in hard currencies, then the net plus or the net minus may give you an indication of wher gold price trend should be.

Right now, IMHO is that the trend should be gold-up as inflation, currency devaluations fears as well as deflation and or stock downtrend fears are everywhere. If there is doubt, still it appears to be very wise to just go min 25% PM's in physical form as an insurance hedge, because of the additional fear of hard currency printing on a 24/7 basis.


Urban Redneck's picture

He didn't use the words alpha or beta anywhere in his explanation...

TeamDepends's picture

"Yet the exchange rates of economies that now make up a significant portion of the global growth pie—Brazil, Indonesia,  India, China, etc—are also quite relevant to the future of the financial markets in the developed world."  That's some fine work, boys.

TheReplacement's picture

Now hold on son.  Are you trying to tell me that water, this water, that water, any water, all water is... wet? 

Ulterior's picture

just wait till Tokyo SE will bring gold down, because they are told to do so

Kirk2NCC1701's picture

Are fluffers a Deflation hedge?  I think so.

FreedomGuy's picture

Gold is insurance and universally convertible. You can drop me in any country in the world with no knowledge of the language or even the currency. If I pull out a gold coin I can begin trading immediately. It is a currency that cannot be manipulated in the same way that China controls it's exchange rate with the dollar.

It is a hedge against many things like inflation, bad monetary policy, Fed/Central bank shenanigans, faux money and general government stupidity. It is a way to take money out of a country without going through NSA, SEC monitored accounts.

There are many excellent reasons to own some physical gold and most all of them are anti-government.

TheReplacement's picture

I get it.  Gold is like guns. 

Doña K's picture

One is insurance for self preservation and the other is insurance for financial preservation. You need both.

imapedestrian's picture

I am personally waiting for the day when a government, which one can b left to your imagination, will create a false flag terrorist attack where gold will be blamed as the financing source.  The terrorists were able to pull off the attack because they used gold to buy their weapons of mass destruction.  Suddenly, NOBODY will want to have any gold, at least in that particular nation and it's allies.

Gold will be toxic and VERY unpatriotic.

imapedestrian's picture

Diddo on bitcoin too...

The only solution will be for every person to be accountable for every transaction made in an economy.  It will be very patriotic.  You will have to accept a tattoo that will be used to track your activity.  They also might put some other goodies in there just for fun.

Stoploss's picture


Jesus was the first terrorist. He traded in gold.

Bohm Squad's picture

...and he wasn't fond of the money changers, either...the spread was one "kolbon" when changing one sheckel into two half-sheckles...or 1/48th (2.08%)




akak's picture

Frankly, I am rather surprised that this particular diabolical scheme has not already been put into play.

PeakOil's picture

In extremis it won't matter what scheme is implemented. Make the US government (not people) more of a laughing stock than it already is.

IPA's picture

I told my wife this done time ago last year.  Don't hate me if the government suddenly decides gold and silver are evil and unpatriotic. 

RaceToTheBottom's picture

Gold doesn't kill people, people kill people.


Or more accurately, Gold doesn't kill currencies, central banksters do.

Vooter's picture

"Gold will be toxic and VERY unpatriotic."

In that case, I would buy as much gold as I could, hopefully from a coin shop as close to the site of the false-flag attack as possible. Then I'd sew some of the coins into a giant gold "666" on an American flag and fly it over my house while taking a steaming, diarrhetic shit on a picture of Wolf Blitzer's face. FUCK EVERYONE.

Cacete de Ouro's picture

A lot of South American drug dealers launder money using gold. They buy imported Italian gold in places like Panama then send it to Miami or even Switzerland for refining, then sell it again. That's one way. Lots of similar scams. So it's not just HSBC, though HSBC have the biggest washing machine.

Scarlett's picture

why do you say scam?  nothing bad about it in my eyes

BLOTTO's picture

Sounds like something right off of James Bond...

HyBrasilian's picture

How many 'fiat' currencies in history have ever collapsed as result of hyper deflation?

Soul Glow's picture

They collapse due to a loss in faith of the system.  I think hyperdeflation would continue to cause that loss of faith.

moonstears's picture

You're in a bi-flation, if you're in the USA. It'll be a while till J6P realizes that he don't need no cable TV. Around the time his 6 pack of suds goes to $12.00, and loaf of bread's $10. He'll buy a Roku.

pachanguero's picture

In Thailand where I live gold is getting sold like crazy.  It's in their DNA.

TIMBEEER's picture

Yeah, asked my Thai gf yesterday what she thought about the recent bank runs. She instantly asked me if she should empty her account.

I have to ask her to show me a gold / coin shop in BKK tomorrow, will know where to carry my excess Baht to, if needed.

The worst trader's picture

There is only one problem with this theory, there is no market.... Gold will make new lows soon enough. Just sayin.

Mad Mohel's picture

Are you also able to eat from your asshole?

Vooter's picture

Hey, as long as bankers keep dying, that's fine. We'll be able to buy more physical...AND laugh at their families. It's a win-win!

satoshi411's picture

No bankers have died, brokers are killing themselves after they sold their family's worthless GS/JPM paper, but not a fucking banker is dead.

Let's define 'BANKER', he's a billionaire that actually controls banks, and when he shits the FED eat's his shit, not one of the TRIBE has killed himself.

Only liitle fucks have died.

Vooter's picture

Who cares? doesn't matter. Chaos and distrust and loss of faith matter. How we get there is immaterial...

The worst trader's picture

Speaking of bit coins, mt gox is off line?

Scarlett's picture

does the NSA pay you per post or per word?  

satoshi411's picture


1.) MT-GOX to go bankrupt, attorneys advise all clients to file demand in USD claims as BTC soon to be worthless.

2.) Bank of Israel declared today that BITCOIN is a PONZI, that right there is a death sentence for BTC.

3.) Winkelvoss Fuck-Twins have created their own BITCOIN PRICING BOX so that BITCOIN will not fluctuate, of course NO real money is at risk, its just that that twins are giving you a new website where the Muppets can be told that ZERO is really a big number.

All three major story's here are being ignored on ZH today.

h0oS's picture

Yeh, as much as I like the physical relic I'm taking puts out on it. Must hedge accordingly in the short term.

AllWorkedUp's picture

Yeah, might as well take a hedge, make it a permanent hedge cause whenever gold goes up you can be sure it will go down again soon therafter. There are no markets.

Imagine gold actually trading like Nat Gas. No, I can't either, gold will never go up 10% in a session.


Scarlett's picture

Mark my words.  


Physical Gold will gain 100% in a single fucking month when the time comes.  And that still won't be the time to sell.


It's nothing but a test of patience and strenght. 

h0oS's picture

I fart natuarl gas, bollocks to that market...

CreativeDestructor's picture

And how much are GaveKal charging for this fine insigtful work? I bet its lot more than 29.99. Another proof of inflation

Soul Glow's picture

Deflation has been kept in check only due to the religious money printing from the central banks - banks no more public than Obama's bathroom.  The IMF has dictated such policy - another institution that follows no public guidelines -and along follow the banks.  

The taper will give a sense of pending deflation but it won't be just deflation.  The two headed beast that is inflation and deflation will breathe fire on the paper markets, and even if bond yields are held low, the dollars they are worth will burn like tinder.

moonstears's picture

"Gold, Bitchez!!"!

See, I used to go to this site, and everytime gold was in an article, you'ld say...

On a "no shit" note, Tiabbi has a Rolling stones story out about the Morgue and Sachs buying warehouses for commodities(remember the aluminum deal?) storage. Got me thinking how it will impact the Au/Ag markets...any thoughts? 

DirtyWilly's picture

Do you all really honestly think that gold is going to get us out of this one?  Worked so well in the 30's, made so many millionares right?

I know, let's all buy gold and support those that own the most of it, they'll never see it coming.

moonstears's picture

Honestly, stock you cupboard first, IMO. Silver's where it's at IMO, after that.

Braverdave's picture

Food cupboard first. Liquor cabinet second. Precious third.

And almost everything else is tied for fourth.

Bohm Squad's picture

Those little shot-sized bottles of liquor cost about a buck where I shopping for preps at the dollar store.

Braverdave's picture

Well, I don't think "all" of us think "gold is going to get us out of this one". Maybe only a few think that.

Who said anything about "millionaires"?

Your last sentence doesn't name who "they" is? I think I know the "they" you speak of (central banks?) and please correct me if I am wrong but the stats I have seen before indicate that it is people like you and me who own most of the gold in the form of jewelry. The count goes up even higher if we count coins and small bars.