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Charles Gave On Gold As A ‘Deflation’ Hedge

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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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Wed, 02/19/2014 - 21:25 | 4455226 HedgeAccordingly
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the purchase of WhatsApp is as good a inflation indicator as many need.. for the moment at least . 

http://hedgeaccording.ly/2014/02/fb-facebook-to-buy-messaging-app-whatsa...

Wed, 02/19/2014 - 23:34 | 4455722 Pool Shark
Pool Shark's picture

 

 

Coincidentally, Mish explained this exactly 7 years ago:

http://globaleconomicanalysis.blogspot.com/2007/02/is-gold-inflation-hedge.html

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

 

Thu, 02/20/2014 - 02:53 | 4456309 Soul Glow
Soul Glow's picture

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

Thu, 02/20/2014 - 06:48 | 4456517 Doña K
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.

 

Thu, 02/20/2014 - 07:59 | 4456605 Urban Redneck
Urban Redneck's picture

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

Wed, 02/19/2014 - 21:28 | 4455238 TeamDepends
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"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.

Thu, 02/20/2014 - 00:05 | 4455902 TheReplacement
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? 

Wed, 02/19/2014 - 21:29 | 4455240 Ulterior
Ulterior's picture

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

Wed, 02/19/2014 - 21:30 | 4455244 Kirk2NCC1701
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Are fluffers a Deflation hedge?  I think so.

Wed, 02/19/2014 - 21:30 | 4455247 FreedomGuy
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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.

Thu, 02/20/2014 - 00:06 | 4455905 TheReplacement
TheReplacement's picture

I get it.  Gold is like guns. 

Thu, 02/20/2014 - 08:15 | 4456623 Doña K
Doña K's picture

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

Wed, 02/19/2014 - 21:39 | 4455273 imapedestrian
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.

Wed, 02/19/2014 - 21:43 | 4455288 imapedestrian
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.

Wed, 02/19/2014 - 21:45 | 4455297 Stoploss
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LOL!!!

Jesus was the first terrorist. He traded in gold.

Thu, 02/20/2014 - 08:05 | 4456615 Bohm Squad
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%)

 

 

 


Wed, 02/19/2014 - 21:59 | 4455361 akak
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Frankly, I am rather surprised that this particular diabolical scheme has not already been put into play.

Thu, 02/20/2014 - 01:59 | 4456216 PeakOil
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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.

Thu, 02/20/2014 - 14:23 | 4458342 IPA
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. 

Wed, 02/19/2014 - 22:07 | 4455399 Tinky
Tinky's picture

Won't happen.

Wed, 02/19/2014 - 22:58 | 4455633 RaceToTheBottom
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Gold doesn't kill people, people kill people.

 

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

Thu, 02/20/2014 - 00:14 | 4455923 Vooter
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.

Thu, 02/20/2014 - 00:23 | 4455948 Cacete de Ouro
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.

Thu, 02/20/2014 - 00:46 | 4456010 Scarlett
Scarlett's picture

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

Thu, 02/20/2014 - 02:24 | 4456198 BLOTTO
BLOTTO's picture

Sounds like something right off of James Bond...

Wed, 02/19/2014 - 21:40 | 4455278 HyBrasilian
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How many 'fiat' currencies in history have ever collapsed as result of hyper deflation?

Wed, 02/19/2014 - 22:19 | 4455442 Soul Glow
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They collapse due to a loss in faith of the system.  I think hyperdeflation would continue to cause that loss of faith.

Wed, 02/19/2014 - 22:38 | 4455540 moonstears
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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.

Wed, 02/19/2014 - 21:41 | 4455281 pachanguero
pachanguero's picture

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

Thu, 02/20/2014 - 01:36 | 4456159 TIMBEEER
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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.

Wed, 02/19/2014 - 21:43 | 4455293 The worst trader
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.

Wed, 02/19/2014 - 22:49 | 4455593 Mad Mohel
Mad Mohel's picture

Are you also able to eat from your asshole?

Thu, 02/20/2014 - 00:03 | 4455895 Vooter
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!

Thu, 02/20/2014 - 04:03 | 4456414 satoshi411
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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.

Thu, 02/20/2014 - 09:32 | 4456816 Vooter
Vooter's picture

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

Wed, 02/19/2014 - 21:47 | 4455310 The worst trader
The worst trader's picture

Speaking of bit coins, mt gox is off line?

Thu, 02/20/2014 - 00:48 | 4456023 Scarlett
Scarlett's picture

does the NSA pay you per post or per word?  

Thu, 02/20/2014 - 04:01 | 4456409 satoshi411
satoshi411's picture

BIG BITCOIN NEWS TODAY

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.

Wed, 02/19/2014 - 21:48 | 4455313 h0oS
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.

Wed, 02/19/2014 - 22:21 | 4455450 AllWorkedUp
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.

THERE ARE NO FUCKING MARKETS

Thu, 02/20/2014 - 00:51 | 4456026 Scarlett
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. 

Thu, 02/20/2014 - 20:55 | 4460061 h0oS
h0oS's picture

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

Wed, 02/19/2014 - 21:52 | 4455325 CreativeDestructor
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And how much are GaveKal charging for this fine insigtful work? I bet its lot more than 29.99. Another proof of inflation

Wed, 02/19/2014 - 21:55 | 4455335 Soul Glow
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.

Wed, 02/19/2014 - 22:26 | 4455474 moonstears
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? 

Wed, 02/19/2014 - 22:37 | 4455535 DirtyWilly
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.

Wed, 02/19/2014 - 22:40 | 4455551 moonstears
moonstears's picture

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

Thu, 02/20/2014 - 00:24 | 4455952 Braverdave
Braverdave's picture

Food cupboard first. Liquor cabinet second. Precious third.

And almost everything else is tied for fourth.

Thu, 02/20/2014 - 08:13 | 4456621 Bohm Squad
Bohm Squad's picture

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

Thu, 02/20/2014 - 00:04 | 4455898 Braverdave
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.

Thu, 02/20/2014 - 10:32 | 4457096 superflex
superflex's picture

If your stacking to become a millionaire, good luck with that.

My stack is insurance, not a Lambo in the driveway in 5 years.

How old are you?

Wed, 02/19/2014 - 22:45 | 4455578 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

People assume that gold is only going to go up in an inflationary environment. wrong. It will go "up" (in terms of exchange to currency) in an environment of fear, and that includes one of deflation. 

Thu, 02/20/2014 - 01:50 | 4456189 The 22nd Prime
The 22nd Prime's picture

My gold doesn't go up or down. Each ounce still weighs one ounce.

Wed, 02/19/2014 - 22:54 | 4455619 Kaiser Sousa
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Silver is the key...look what they r doing in the illiquid markets and openiong in Austrailia...

aint nobody selling no real fucking Silver....

 

http://www.kitco.com/charts/livesilver.html

Wed, 02/19/2014 - 22:58 | 4455639 Peter Pan
Peter Pan's picture

Gold is a hedge against madness.

Thu, 02/20/2014 - 03:27 | 4456363 TIMBEEER
TIMBEEER's picture

Gold is a hedge against Your elected politicians.

Wed, 02/19/2014 - 23:08 | 4455687 Ewtman
Ewtman's picture

Not everyone buys into the gold for safety idea..,

"Many people seem to want to link gold to the dollar in an inverse relationship. But gold is less linked to the dollar than it is the stock market. As a commodity, gold will collapse in sympathy with the stock market as will all other commodities. A stronger dollar is the result of shrinking market value so in that respect gold and the dollar share a common linkage. But gold will only play a major role if and when the dollar begins to hyper-inflate. For the foreseeable future that won’t happen and those who understand what is happening these days are chanting the mantra, 'Cash is King'."

 

http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...



Thu, 02/20/2014 - 01:03 | 4456072 Soul Glow
Soul Glow's picture

Good luck with your fiat paper.  It's value is tied to the financial system, and the financial system will crash and burn and economics as we know it will be seen as a sham.

Gold is money and will back whatever debt/repayment system comes next.

Thu, 02/20/2014 - 10:24 | 4457051 Toolshed
Toolshed's picture

"But gold will only play a major role if and when the dollar begins to hyper-inflate. For the foreseeable future that won’t happen"

You are probably correct, but remember this quote from an infamous PHD'd douche bag:

""At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

I like this one too:

"The Federal Reserve will not monetize the debt."

 

Wed, 02/19/2014 - 23:22 | 4455743 Curt W
Curt W's picture

The problem with gold is that it is not backed by anything.

http://www.youtube.com/watch?v=ZLL2r3hXmjA

Thu, 02/20/2014 - 00:32 | 4455975 The Wisp
The Wisp's picture

they at least could have found  a Blond to give that speech,

Thu, 02/20/2014 - 01:07 | 4456078 bluskyes
bluskyes's picture

That's also it's greatest strength.

Most people have a short memory, but they are soon going to learn a painful, life-altering lesson, about counter-party risk.

Thu, 02/20/2014 - 00:14 | 4455922 Solarman
Solarman's picture

Gold is the sun, The reserve currency is Mercury, The reserve currencies bonds are Venus, and the Stock market is Earth.  That is how people will roll down.  Gold simply is.

Thu, 02/20/2014 - 01:00 | 4456058 Soul Glow
Soul Glow's picture

The mining sector was sold big today.  When the only chink in gold's armor is JPM's ability to short the entire sector, you can bet we are in for a bullish move.

Thu, 02/20/2014 - 04:13 | 4456426 Debugas
Debugas's picture

why gold rising on taper ?

the answer is simple - speculators rotating out of stocks into gold

Thu, 02/20/2014 - 04:21 | 4456432 knowshitsurelock
knowshitsurelock's picture

This time is different.  Joe Six Pack will be spending his money to pay his electric bill, due to the unseasonally cold winter this year.  Utility bills are running four times their average, so...

This time, it's the weather.

Thu, 02/20/2014 - 04:40 | 4456448 Remnant_Army
Remnant_Army's picture

What I'm waiting for is the first time that someone uses a term "physical food".

I missed the "physical gold" birth. 

Thu, 02/20/2014 - 04:47 | 4456449 satoshi411
satoshi411's picture

MT-GOX Fucks Bitcoin World

http://www.ft.com/cms/s/0/f3c6cf28-99f6-11e3-a407-00144feab7de.html

 

Bitcoin aficionados wash their hands of Mt Gox

 

http://www.haaretz.com/business/1.575233

 

 

Bitcoin is risky, Israel warns amid talk of regulating virtual currency Supporters are drawn to its decentralized platform. Detractors call it a bubble prone to be exploited by criminals.

 

Thu, 02/20/2014 - 07:05 | 4456511 XAU XAG
XAU XAG's picture

There is only 5oz of gold for each person on the planet and with CB's holding a large percentage............prob only 2.5 oz per person.

Those that think the US will revalue gold to cover thier debt have it wrong.........it will be a loss of confidence in the worlwide fiat system that will re price gold.

Think of all the emerging nations that have wealthy peeps..........that is why Gold is going from west to east................and as they say it won't be comming back.

The paper price will collapse.............as they will have no physical to offer........it's happening now and has been for a while.

The East has a longer memory than the West when it comes to money.

While governments want money growth (credit) beyond the amount of stock of gold that can increase each year...........it will increase in price.

If they try and control the price ............the price control will fail as it has been tried in the past.

Gold was disgarded as money as it could not full fill gov's aggenda for credit growth (bubbles) so they can have there cut in taxes from the growth.

The ilusion of wealth in the value of fait money is the biggest ilusion of all.

So you own a house worth X that house 10,20,30,40,50 years ago was worth what??

And with the low interest available for any fiat cash makes it worthless

10% of a 100 = 10 with inflation at 8% you are 2% better off

1% of a 100 = 1 with 5% inflation you are 6% worse off

Hence the distruction of the middle class.......when peeps wake up from the media inflicted slumber (and they are one by one slowly) and decide to check out of the system buying gold and silver for saving (as they are already doing in the east) gold and silver have only one way to go......and that is up

 

It won't matter if the west does not save in gold and silver the East will and that is what will make it more exspensive.

It maynot make you able to buy more than you already can (purchase wise (value)) but you will be able to hang onto your purchasing power at the current rate.

my rant of the day LOL

 

 

Ps

This prob explains it better than anything ( off line when I post) will be back

 

http://www.mauldineconomics.com/ttmygh/appetite-for-distraction1

Thu, 02/20/2014 - 08:00 | 4456608 orangegeek
orangegeek's picture

Gold is a commodity that trades (a few year ago it was a hedge against inflation and now the comments say opposite - both are nonsense - someone is selling you something folks).

 

Gold is in wave 4 up and may hit 1425.

 

http://bullandbearmash.com/chart/spot-gold-daily-pulls-consecutive-days-...

 

And thereafter is will likely fall again as the USD strengthens.

Thu, 02/20/2014 - 09:18 | 4456760 JailBanksters
JailBanksters's picture

Gold ain't going up anytime soon, up a 100 bucks down a 100 bucks is all your going to get. As long as the BOE and Club Fed exists and is giving money away to their buddies to buy and sell as many Gold IOU's as they like, it ain't going anywhere.

Of course you can always buy more Physical when they manipulate it down, and when they run out Gold to support the IOU scam, they will just Confiscate your Gold again.

Do NOT follow this link or you will be banned from the site!