Gold in a Deflationary Economy

Part- IV

December 15, 1998

To briefly review where we left off in part III of Gold In A Deflationary Economy, wholesale prices are used to measure Commodity Prices (the Index is called "CP") since there are consistently well-recognized wholesale price indices available since 1790, and since before that, wholesale prices extend homogeneously from 1560 through 1850 with data from meticulous records from England, chiefly from statistician Lord Beveridge and his associates published in their Prices and Wages in England from the Twelfth to the Nineteenth Century. As you can see, then, the Jastram study plays right into our hands as investors of today.

Wholesale Prices: The Key Measure Of Inflation & Deflation

The History Of Gold, Inflation, and Deflation:
The American Experience

To best illustrate gold's tendencies over the past 438 years, I focus on what Jastram calls The American Experience--the statistical analysis of gold prices in America-for two key reasons. First, American colonies were, as Jastram notes, essentially English, and their settlers felt themselves to be Englishmen. Anglo-Saxon law prevailed, and cultural attitudes were similar. Secondly, and most importantly, I use the American Experience since I seek to continue the Jastram study, which ended when gold was at only $100 in 1976. Gold has since made a virtual round trip to $900 and nearly back again, but more importantly America is the economic superpower of today. I say this not as a statement of American vanity but as one of true economic power and the power of seignorage-the ability to profit from the mintage of money. The U.S. dollar is the international reserve currency and as such it gives the U.S. power (unfair power, one might add) and income that other countries do not have. Other countries, for example, must settle their deficits with owned reserves but the U.S. has been able to settle its deficits by writing out its own IOU's, which, instead of being returned for payment, are added to reserves. Other countries, therefore, have a drain on reserves whereas the U.S. pulls in reserves8. This makes extrapolation of the Jastram study to support forecasts made over the years by The Global Market Strategist best suited in U.S. dollars.

Another reason to present the American experience here is that 1999 will bring the inception of a new and powerful currency in Europe, the euro. This is the most significant monetary and political development in decades, and The Global Market Strategists forecasts that the euro will rival the U.S. dollar in such a way as to begin to remove that unilateral power from the U.S. In fact, it ultimately may be the powers that be at the new European Central Bank, vis-a-vis the euro, that force the globe back on the gold standard. Obviously, though, the euro is too new-a fetus in a millennia-long world of English and American experience-to use as a study of the golden constant.

Well-recognized and consistent data in America begin in 1800, and one will find that conclusions to be drawn from both the American Experience and the English Experience are exactly the same. Additionally, Jastram observes that many economists have agreed that "no business cycle of a modern type can be found before the close of the eighteenth century," again making the American experience relevant to the purpose of this report: to isolate investment opportunity in 1998 and beyond, and as such we are more concerned about the future than the past. (With regard to the business cycle, though, it must be noted that one should not infer from the episodes of monetary inflation and deflation presented here movements in trade approximating what we now refer to as business cycles). In any case, for all these reasons (but not to discredit pound sterling or England) I stick to the American experience in this particular presentation.

*The entire 438-year study can be categorized into periods of inflation and deflation. The most consistent data and most dominant economy was that of England's until the 20th century. To continue the study to the present time (through the end of 1997) and for reasons given in this report, the Americna period from 1932-1008 is used in the above table.

*Since 1800, England has had about as many years of deflation as inflation--74 years as compared with 78. The most recent deflation was the most severe.

*There have been an equal number of periods of deflation and inflation since 1792, that is, since the Industrial Revolution.

*35% of the past 206 years in the U.S. have been characterized by deflation, which returned in 1997 (-1.1% for 1997 and -3.5% rate of decline for the first quarter of 1998 in the U.S. Producer Price Index).

Data source from above tables: Jastram Study

The American Experience
Period I: Deflation of 1814-1836

Duration: 16 years
Commodity Prices: -50%
Purchasing Power of Gold: +100%
Monetary System: The gold standard

Speculation in new land had been growing in the years leading up to this deflationary period, and now there were many failures. The failures of speculation added to the financial chaos. Unemployment was severe and aggravated by the enormous flood of imports flooding the domestic markets. Credit contractions caused widespread financial difficulties by 1818, exacerbated by forced selling of land. The collapse of speculation in the slave markets of the South added to economic difficulties. Shortages of credit led to forced selling of land deals. Dullness in trade and industry continued.

Above This is the first of many periods of time illustrated in this report that show a very consistent phenomenon: that holders of gold gain in operational wealth during deflation since gold's purchasing power rises as commodity prices fall. In this example, the purchasing power of gold soared 100% during the period, meaning that one could buy twice the amount of the same commodities with the same amount of gold in 1830 as one could have purchased in 1814. Note throughout the illustrations in this report that gold gains in purchasing power even when the monetary system in use is the gold standard during which the price of gold is fixed. If the price of gold is allowed to fluctuate, as it does now in 1998, one can gain even more wealth if gold moves up even as commodity prices are declining and one speculates on the price of gold by investing in it. Below Except for the period leading up to and including the American Civil War, wholesale prices declined in the U.S. and England throughout most of the 19th century. During that 100 years, the purchasing power of gold increased 68% while the Jastram Commodity Price Index fell 36.4% in America. All the while-except during the Civil War-the price of gold was constant.

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).