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The question has been pouring in:  “What happens to gold during a deflation? Of course, many of my readers are equally if not more interested in what happens to silver in a deflation as well.

The views on this topic vary. Some insist that both metals will do well under almost any economic conditions; some, like Bob Prechter, think neither gold nor silver will do well; and others, like Jim Sinclair and Bob Hoye, believe gold and gold alone will be the only thing left standing.

In all matters such as these, studying the past can be beneficial, but—as you have read so many times before—knowing the past is not a guarantee of future results. Personally, I like to let the market speak, and for many years I have forecast that a day would come when the price of the physical silver market would separate from the price “set” in New York or London. Alas, this is the case when looking at the retail market versus the commercial market.

In all fairness, the COMEX price is being used as predicted to capture profits by purchasing COMEX bars and selling 100-oz. silver bars. Jason Hommel of Silver Stock Report has stated:

“I own over 200,000 oz. of silver. I’m not selling out. I’m only selling 12,500 ounces, and I plan to buy more silver, cheaper, but in a different form, such as 1000 oz. bars.

“The price manipulation at the COMEX is so severe, that it has now created the profit incentive to create a free market in silver, through this auction, in order to arbitrage between the two markets, by buying in one, and selling to the other.”

Readers might recall I wrote an article titled Silver Arbitrage, back in August.

Looking at the Opinions

Dr. Marc Faber: “Therefore, under both scenarios—stagflation or deflationary recession—gold, gold equities, and other precious metals should continue to perform better than financial assets.” See article here.

Castrese Tipaldi wrote on Financial Sense University, “I don’t know if in the last week we saw the last gasp of those usual subjects trying to cap gold, and I don’t know if we now have the very last possibility to get silver at a price so cheap.” What makes this quote so interesting to me is he wrote this on April 20, 2004. See article here.

Steve Saville of the Speculative Investor writes, “The most important difference between then (the 1930s) and now is that gold and cash US Dollars were interchangeable during the early 1930s (the deflationary period) by virtue of the fact that the Dollar was defined as a fixed weight of gold. A typical effect of deflation is an increase in the purchasing power of cash. The fact that gold and cash were officially linked during the 1930s meant the deflation caused the purchasing power of gold to increase along with the purchasing power of cash. In other words, under the monetary system that was in effect during the 1930s gold was a hedge against deflation. Furthermore, under such a system the purchasing power of gold would decrease during periods of inflation; that is, when the dollar was defined in terms of gold, it would have made sense to shift investment away from gold during periods of inflation.” See entire article here.

Adam Hamilton of Zeal LLC wrote, “Anything typically financed by debt is likely to see its prices plunge dramatically, like houses and cars, as the ongoing Great Bear bust continues to destroy the gross excesses of debt via higher long rates. Conversely, anything not typically ‘paid for’ with debt, including groceries and general living expenses, is almost certain to rise in the coming years. We are staring down a brutal environment of widespread inflation marked by various sectors witnessing falling prices as debt leverage implodes.” See entire article here.

One of my favorites is from Dan Ascani, who wrote essentially about Professor Jastram’s very long-term study on gold, and he essentially states that Jastram studied four pronounced price deflations taking place. In all four deflations, operational wealth in the form of gold appreciated handsomely. When one sees that just by holding gold for 13 years, from 1920 to 1933 operational wealth would have increased 2½ times, one realizes that gold can be a valuable hedge in deflation—however, a poor one in inflation. See full article here.

Gary North states, “There are a few contrarians who think that deflation is coming: both monetary deflation and price deflation. As far as I know, there are only about a dozen of them who write newsletters or run websites. For some reason, most of the deflationists seem to think that gold’s price will rise in a mass deflation. They do not warn their subscribers, ‘Don’t buy gold or silver!’ If they did, they would have fewer subscribers.

Bob Prechter has written much on the topic; his overview of defining Inflation and Deflation can be found here. Further, Bob goes on and states that neither gold nor silver will do well in the deflation he had predicted for so long. Specifically, “I’ll cut right to the chase: Unless you’re about 80 years old, the United States economy is undergoing the worst downturn in living memory. Every measure of growth is grim. The world’s most recognized stock index—the Dow Jones Industrial Average—is down 30% from its October 2007 all-time high.

“If ever there was a time for the ‘Safe-Haven’ lure of precious metals to surface—now, yesterday, even seven months ago when the Bear Stearns’ bailout launched the historic reshaping of Wall Street—would have been it. Yet, from its March 17 record peak, GOLD prices have plummeted more than 20%.” The entire article can be found here.

So we can read many varying views on what will happen to gold and/or silver under a deflation. Right now the financial marketplace is so unstable that it is difficult to put too much faith in anyone’s opinion based upon such a short snapshot. Doug Casey has repeated often that the metals, and particularly gold, are a CRISIS HEDGE. I think this is the way to look at the situation. As I stated so many years ago in my Ten Rules of Silver Investing…

Rule # 1. When ALL else fails, there is silver.

“No one likes to be a prophet of doom, but the simple truth is that silver is the world’s money of last resort. Should a severe economic collapse occur, leaving paper assets worthless, silver will be primary currency for purchase of goods and services. (Gold will be a store of major wealth, but will be priced too high for day-to-day use.) Thus, every investor should own some physical silver-and store a portion of it where it’s accessible in an emergency.”

When the editor of the book who published all ten rules called me back, he was “all over” this first rule and stated he had never really thought of silver’s role before. Of course, he was quick to scoff at the idea of an economic collapse. I wonder what his thoughts on the subject are, currently. It is an honor to be,

David Morgan

Mr. Morgan has followed the silver market daily for more than thirty years. Much of his Web site, is devoted to education about the precious metals.

Mr. Morgan publishes a private newsletter for serious precious metals investors. He hosts the web site:He has been a private economist for over two decades his background in engineering , with an advanced degree in Economics/Finance. He has been interviewed on Don McAlvany's radio talk show, Financial Sense Newshour, Hard Money Watch, and appeared on television. Currently he does an internet radio wrap up each Friday discussing the economy and precious metals. Mr. Morgan was published in Global Investor regarding ten rules of silver investing. Currently, he is writing a book on silver.

  Close Gain/Loss On Week
Gold $785.95 -$16.20 -7.75%
Silver $9.345 -$0.22 -10.92%
XAU 85.85 -2.80% -14.63%
HUI 203.24 -3.25% -18.09%
GDM 602.61 -2.80% -15.62%
JSE Gold 1738.50 -119.47 -8.43%
USD 82.40 +0.09 -0.28%
Euro 134.23 -0.22 +0.22%
Yen 98.53 +0.15 -0.97%
Oil $71.85 +$2.00 -7.53%
10-Year 3.938% +0.002 +1.99%
Bond Error Error Error
Dow 8852.22 -1.41% +4.75%
Nasdaq 1711.29 -0.37% +3.75%
S&P 940.55 -0.62% +4.59%

The Metals:

Gold rose 1.6% to $815 in Asia before it fell back off in London and dropped to as low as $772 by late morning in New York, but it then rallied back higher in the last couple of hours of trade and ended almost $14 off its low with a loss of 2.02%.  Silver rose 3.7% to $9.92 in Asia before it fell to as low as $9.075 in New York, but it ended nearly 3% off that low with a loss of just 2.3%.

Euro gold fell to about €583, platinum lost $17 to $859.50, and copper gained roughly 8 cents to about $2.18.

Gold and silver equities fell over 7% at the open before they rallied back higher and saw modest gains by mid-afternoon, but they then fell back off into the close and ended with about 3% losses.

The Economy:

Report For Reading Expected Previous
Building Permits Sep 786K 840K 857K
Housing Starts Sep 817K 870K 872K
Michigan Sentiment Oct 57.5 65.0 70.3

All of this week’s economic reports:

Michigan Sentiment - October 57.5 v. 70.3
Housing Starts - September 817K v. 872K
Building Permits - September 786K v. 857K
Philadelphia Fed - October -37.5 v. 3.8
Industrial Production - September -2.8% v. -1.0%
Capacity Utilization - September 76.4% v. 78.7%
Net Foreign Purchases - August $14.0B v. $8.6B
CPI - September 0.0% v. -0.1%
Core CPI - September 0.1% v. 0.2%
Initial Claims - 10/11 461K v. 477K
Business Inventories - August 0.3% v. 1.1%
NY Empire State Index - October -24.6 v. -7.4
Retail Sales - September -1.2% v. -0.4%
Retail Sales ex-auto - September -0.6% v. -0.9%
PPI - September -0.4% v. -0.9%
Core PPI - September 0.4% v. 0.2%

Next week’s economic highlights include Leading Economic Indicators on Monday, Initial Jobless Claims on Thursday, and Existing Home Sales on Friday.

The Markets:

Oil rose on hopes for signs of recovering worldwide demand next week while OPEC may also announce a production cut at its emergency meeting next Friday.

The U.S. dollar index ended higher in mixed trade as the euro fell on the view that Europe may have more problems going forward than the US.

Treasuries fell on more worries over the need to issue additional debt and whether or not there will continue to be buyers for it.

The Dow, Nasdaq, and S&P fell markedly at the open before reversing to see impressive gains midday, but all three indices then fell back off into the close and ended modestly lower on uncertainty over the health of the economy and financial system overall.

Among the big names making news in the market Friday were ING, Honeywell, IBM, Pfizer, Schlumberger, and Warren Buffet.

The Commentary:

Dear Friends,

  1. As we approach elections everything possible is being done to keep equities from total implosion.
  2. As we approach elections everything possible is being done to keep the hollow US dollar firm
  3. As we approach elections everything possible is being done to keep gold under control to assist in keeping the dollar firm.
  4. Gold is NOT a commodity. It is a currency.
  5. There is an appearance of involuntary liquidation in gold as hedge and gold funds are pressed by redemptions and needs for capital to pay off investors.
  6. Gold never changes. Things change in price comparison to gold, so therefore you can jump up and down on the barometer but that will not change the circumstances it is reading.
  7. The means of keeping all things in check is to demoralize those whose positions oppose the goal while showing some sunshine to those who wish to keep their positions.
  8. Nobody on earth can prevent the CONSEQUENCES of Chairman Bernanke and Secretary of the Treasury Paulson's attempt to offset the unavoidable CONSEQUENCES of the same actions taken by the central bank and treasury of the 1930s.
  9. The different monetary action now in the degree applied will have their own and different CONSEQUENCES in the degree of economic impact.
  10. The dichotomy between the bullion supply/demand picture and the easy to manipulate paper gold market continues. Pedro says: "A "friend" of mine was inZurichyesterday. Aside from the fact that there were no gold coins available in one of the major centers of the world gold trade, it was also noted that there are no longer any large safe deposit boxes available at Credit Suisse Banhofstrasse."
  11. Here is where we are headed to some degree, regardless of the manipulation of markets to paint charts at an unprecedented level.

Most readers will be familiar with the great hyperinflation of Weimar Germany. Indeed, it is often held up as the icon of what can go drastically wrong when government throws off all restraint in regards to the production of fiat money. I do not need to labour the point much as to how billions and then trillions of marks were literally not worth the paper they were printed on and how workers had to be paid by the hour lest their wages rapidly lost purchasing power in the brief time between being paid and spending that same money.

As ever, gold and silver proved to be safe havens from the ravages of inflation. Indeed, anything other than the mark seemed to a good place to park one's wealth. In those days, that could be anything from bedpans to US dollars to precious metals. However, depending on one's accumulated wealth, gold and silver were amongst the top assets in terms of holding and transporting wealth. Despite this, one set of figures and one notable week in the life of Weimar Germany demonstrated that one particular form of wealth proved to be in particularly heavy demand

  1. Don’t let the unprecedented bullying of all markets to meet political expediency draw your attention off the ball.

There are defined CONSEQUENCES to the new approach taken by the top expert of the 1929 to 1940 depression. The error is that these actions will have CONSEQUENCES different from 1930 and they will be more devastating than one can ever imagine.

Monetary inflation, "the unlimited creation of fiat money," will cause massive price inflation regards of the level of business activity

“December Gold closed down 16.8 at 787.7. This was 12.7 up from the low and 4.3 off the high.

December Silver finished down 0.3 at 9.335, 0.145 off the high and 0.175 up from the low.

The gold market started out on a weak footing and then came under more intense pressure in the wake of softer than expected US housing starts and permits data. However, the gold market seemed to bounce slightly in the face of the mid day equity market recovery and that would further the argument that gold is seeing the threat of too much slowing as a more important element than the potential for aggressive flight to quality buying. While some might suggest that the Dollar action was responsible for the weakness in gold, it should be noted that gold was down early in the trading session when the Dollar was lower. The fact that gold didn't seem to get any lift from stronger energy prices suggests that even the physical commodity market angle wasn't capable of boosting gold prices.

The silver market was weaker throughout the trading session Friday. In fact, silver was down in conjunction with the gold market and even though equity prices bounced and at times before the silver close were moderately higher that didn't seem to benefit the silver bulls. With the Dollar eventually regaining some positive traction after a slump in the wake of the scheduled US numbers one could suggest that current market action contributed to the weakness in silver prices. The fact that copper and energy prices were higher during the session didn't seem to spark much bargain hunting buying interest in silver despite the fact that silver on the week was down roughly $1.30 an ounce from the prior week's close.”- The Hightower Report, Futures Analysis and Forecasting

GATA Posts:

More on the strange disparities in gold, silver markets

Daily bank borrowing from Fed rises to $438 billion

Fears of Lehman's CDS derivatives haunt markets

The Statistics:

As of close of business: 10//2008

Gold Warehouse Stocks: 8,561,477 +37,498
Silver Warehouse Stocks: 133,582,226 -564,824

Global Gold ETF Holdings

Product name Total Tonnes Total Ounces Total Value
New York Stock Exchange Arca (NYSE Arca) AND Singapore Exchange (SGX) AND Tokyo Stock Exchage (TSE) AND Hong Kong Stock Exchange (HKEx) SPDR® Gold Shares 756.86 24,333,868 US$ 19,524m
London Stock Exchange (LSE) AND Euronext Paris AND Borsa Italiana AND Frankfurter Wertpapierbörse (Deutsche Börse ) Gold Bullion Securities 123.53 3,971,471 US$ 3,123m
Australian Stock Exchange (ASX) Gold Bullion Securities 11.97 384,414 US$ 303m
Johannesburg Securities Exchange (JSE) New Gold Debentures 26.22 842,882 US$ 676m

Note: Change in Total Tonnes from yesterday’s data: SPDR subtracted 10.74 tonnes.

COMEX Gold Trust (IAU)

Profile as of 10/16/2008  
Total Net Assets $1,689,941,912 Ounces of Gold
in Trust
Shares Outstanding 21,400,000 Tonnes of Gold
in Trust

Note: No change in Total Tonnes from yesterday’s data.

Silver Trust (SLV)

Profile as of 10/16/2008  
Total Net Assets $2,214,205,830 Ounces of Silver
in Trust
Shares Outstanding 224,400,000 Tonnes of Silver
in Trust

Note: No change in Total Tonnes from yesterday’s data.

The Stocks:

Harmony’s (HMY) output, IAMGOLD’s (IAG) appointment of Elaine Ellingham as the Senior Vice President of Investor Relations & Communications, Ivanhoe’s (IVN) negotiations with the Mongolian Government, AngloGold’s (AU) non-recommendation of a mini-tender offer, and ECU’s (ECU.TO) assay results were among the big stories in the gold and silver mining industry making headlines Friday.


1.  Apex Silver SIL +7.56% $1.85
2.  ITH THM +7.21% $1.19
3.  Fronteer FRG +7.01% $1.68


1.  Allied Nevada ANV -17.43% $3.08
2.  Banro BAA -10.34% $1.30
3.  Endeavour EXK -9.57% $1.04

Winners & Losers tracks NYSE and AMEX listed gold and silver mining stocks that trade over $1.

All of today's gold and silver stock news:

Sage Closes First Tranche of Private Placement -
October 17, 2008 | Item | E-mail

Aurora Gold Corporation Announces That a Ground Geophysics Program on the São João Joint Venture Project in the Tapajos Gold Province Is Nearing Completion -
October 17, 2008 | Item | E-mail

Cartier Acquires Two New Gold Properties -
October 17, 2008 | Item | E-mail

Manicouagan Minerals Reports Transfer of Shares by Insider -
October 17, 2008 | Item | E-mail

Miranda Reports Termination of Red Hill Agreement -
October 17, 2008 | Item | E-mail

Amerigo Announces Q3 2008 Production Results -
October 17, 2008 | Item | E-mail

Strait Gold Amends Warrants -
October 17, 2008 | Item | E-mail

Freewest Continues to Generate Encouraging Drill Results on its 100%-Owned McFaulds Property, Northern Ontario -
October 17, 2008 | Item | E-mail

Global Gold Registers Significant Discovery in Armenia at Toukhmanuk -
October 17, 2008 | Item | E-mail

Nunavik Nickel Project Exploration Update: New Zone of High-Grade Massive Sulphides Intersected at Giraffe -
October 17, 2008 | Item | E-mail

Western Troy Stakes Claims on Molybdenum Anomaly Southwest of the Troilus Mine in Quebec -
October 17, 2008 | Item | E-mail

Colorado Goldfields Inc. Pays 30% Stock Dividend -
October 17, 2008 | Item | E-mail

Reverse circulation drill results from Bansié Project, Burkina Faso -
October 17, 2008 | Item | E-mail

Farallon Raises $7.75 Million Through Notes -
October 17, 2008 | Item | E-mail

Radisson Mining Completes Acquisition of Mining Claim in Dryden Area of Ontario and Updates Two Drill Programs -
October 17, 2008 | Item | E-mail

Osisko Launches Normal Course Issuer Bid -
October 17, 2008 | Item | E-mail

Probe Mines Exploration Update -
October 17, 2008 | Item | E-mail

Solex Resources Corp. Announces Fiscal 2008 Year End Results -
October 17, 2008 | Item | E-mail

Golden Phoenix Implements Corporate Cost-Cutting Measures -
October 17, 2008 | Item | E-mail

Alexis Discovers Copper-Rich Massive Sulphide Zone With 54.0 Metre Copper-Rich Stringer Zone Adjacent to the Louvicourt Mine in Val d'Or, Quebec -
October 17, 2008 | Item | E-mail

Blue Note to put Caribou and Restigouche on temporary care and maintenance -
October 17, 2008 | Item | E-mail

S.Africa's Harmony output, costs to rise in Q3 - "Africa's third largest gold producer, Harmony Gold (HARJ.J: Quote, Profile, Research, Stock Buzz), said on Friday output and unit cash costs in the September quarter had risen, and it was confident of a higher gold price." More
October 17, 2008 | Item | E-mail

Vena Resources Discovers High-Grade Coarse Gold at Pucara-Gold/Copper Project in Peru and Expands Development Program -
October 17, 2008 | Item | E-mail

Kalimantan Gold Plans Private Placement -
October 17, 2008 | Item | E-mail

Globex: Update on Exploration and Prospects -
October 17, 2008 | Item | E-mail

IAMGOLD Announces Appointment of Senior Vice President, Investor Relations & Communications - "IAMGOLD Corporation ("IAMGOLD" or "the Company") (Toronto:IMG.TO - News)(NYSE:IAG - News)(BOTSWANA: IAMGOLD) is pleased to announce the appointment of Elaine Ellingham as the Senior Vice President of Investor Relations & Communications effective October 14, 2008."
October 17, 2008 | Item | E-mail

ECU Silver and Golden Tag Cut Additional Massive Sulphides at San Diego - "Initial assay results received from drill hole SD-08-34 are very encouraging.. In particular, this hole cut additional massive sulphides with significant grades in silver, lead and zinc (see Table 1 below) and confirms the ongoing continuity of La Rata Vein. The results from the La Rata Vein continue to demonstrate sulphide grades that are among the richest within the San Diego Project area."
October 17, 2008 | Item | E-mail

Ivanhoe Mines and Rio Tinto Reaffirm Readiness To Engage in Investment Agreement Negotiations With Mongolia for Development of Oyu Tolgoi Project- "John Macken, President and CEO of Ivanhoe Mines, and Bret Clayton, Rio Tinto's Chief Executive, Copper & Diamonds, said today that they were looking forward to engaging in negotiations with the Mongolian Government to conclude an Investment Agreement for the development of the Oyu Tolgoi copper-gold project in Mongolia's South Gobi Region."
October 17, 2008 | Item | E-mail

AngloGold Ashanti Does Not Recommend or Endorse Below-Market Mini-Tender Offer From TRC Capital - "AngloGold Ashanti announced today that it has been notified of an unsolicited below-market "mini-tender offer" by TRC Capital Corporation of Toronto, Canada to purchase up to 4,000,000 American depositary shares ("ADSs") of AngloGold Ashanti Limited (each of which represents one ordinary share), representing approximately 1.14% of AngloGold Ashanti's outstanding share capital, at a price of US$18.00 per ADS. AngloGold Ashanti cautions shareholders that this offer represented a 2.65% discount to the US$18.49 closing price of ADSs on the New York Stock Exchange on October 15, 2008, the day prior to the date of the offer and a 2.39% discount to the US$18.44 closing price of ADSs on October 16, 2008."
October 17, 2008 | Item | E-mail

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