Conventional wisdom has it that deflation is bearish for gold prices, but that’s actually not the case, according to TheStreet.com.
Gold has plunged in recent days, dropping 5 percent to a five-month low of $1,587 an ounce Wednesday, amid the dollar’s strength and signs of falling inflation.
In the United States for example, consumer price inflation decelerated to 3.5 percent for the year ended in October from 3.9 percent for the year ended in September.
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But that doesn’t mean gold should fall. A recent report from the American Institute for Economic Research shows that the U.S. economy has experienced 15 episodes of inflation during the past 221 years. And during those combined periods, the purchasing power of gold increased by 31 percent.
|(Associated Press photo)
"Gold is a store of value even during deflations," Gregg Van Kipnis, chairman of American Investment Services, writes in the report obtained by TheStreet.com.
"The purchasing power of gold rises because it does not go down in value to the same extent the price level declines."
Gold generally falls initially on news of deflation and then rebounds. For example, gold plunged 20 percent in the first 24 days of October 2008. Then it jumped 52 percent over the next year.
Some market participants expect the precious metal to rebound soon. “Most of the factors that pushed gold higher in 2011 are not going away,” UBS analysts write in a report obtained by Bloomberg. They expect gold prices to average $2,050 next year.
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