The Sarcasm Report v.57

Explaining Gold’s Appeal in a Deflationary Environment

Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.

That's really good to know. So if interest earned on 90-day Treasury bills is 10% but the inflation rate is 12% then that will be a signal for governments to try to stop deflation and reflate the economy. No wonder the 1970s were so awesome for gold. The government spent nearly the entire decade successfully fighting deflation. Who knew?

The twin engines of negative real interest rates and government deficits tend to make gold a very attractive investment. Recent research supports our historical findings on what drives gold.

So deflationary environments are known for their negative real interest rates? I mistakenly thought that was a stagflationary environment. I stand corrected!

The Federal Reserve’s main interest rate is near zero and inflation is a little over 1 percent, so we now find ourselves in a negative real interest rate situation.

So if inflation is a little over 1 percent, then this would still count as a deflationary environment? It's like everything I ever thought I knew was wrong.

I'm almost convinced. I'm earning a little over 1 percent in my ING Direct savings account and inflation is a little over 1 percent. I clearly wouldn't want to lose too much of my purchasing power by continuing to do that. Perhaps I should move money into something that's risen 400% over the last decade just to be completely safe. Hey, maybe I can even borrow money at these incredibly low interest rates and leverage up my bet. It sounds like a sure thing.

I still need to know why gold's price fell in late 2008 as oil crashed in a spectacular way and housing crumbled though. That part is still confusing to me. If that wasn't a deflationary environment, then what was it?

As I look to his charts for more insight, I see that the low gold prices of the 1990s eventually led to cuts in exploration, which led to falling production, which led to higher gold prices. That will be especially good to know if I ever find myself back in the 1990s again.

I thank CEO Frank Holmes for his unbiased gold insights and hope that his World Precious Minerals Fund (UNWPX) and his Gold and Precious Metals Fund (USERX) do well for both him and his company.

I now understand why investors love gold in inflationary environments, deflationary environments, and at any price. It all makes sense now.