Does Deflation only exist when priced in Gold?

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Does Deflation only exist when priced in Gold?

Wed, 23/06/2010 - 12:12 | Aggregated Awareness

The ongoing "Inflation vs. Deflation" Debate had us thinking lately. Yes, you may claim that this "thinking" is dangerous. And even though it is foolhardy to make any inference from this data, we will still add to the noise by presenting it here.

Now, whether one defines these two 'flations as monetary inflation or price inflation; or monetary deflation or price deflation; doesn't matter for the purposes of this missive. It is enough to know that Inflation is the phenomena of being able to buy less of a given thing with one dollar or one unit of a given currency or money, whatever you would define currency or money to be, and Deflation is the phenomena of being able to buy more of a given thing with one dollar or one unit of a given currency or money.

Now that we've got that out of the way, this "Inflation vs. Deflation" discussion got us thinking: Why would the so called "Deflationists", argue that one dollar, or one unit of a given currency, buys more today than it did, say, 3 years ago? There are many economic & market commentators out there whose observations we respect, and they are calling for deflation. Presumably, this deflation they are calling for is in respect to a given unit of paper currency. We do not agree with this simple prognosis. However, we wanted to do some analysis which would show that deflation exists, even if the place where it exists is not necessarily the dollar or any other unit of a given paper currency. So, we started charting various things that we found from Stockcharts.com, in terms of Gold.

What were the results?

Well, we'll let you figure that out for yourself when you view the attached charts. All that can be said, from our point of view, is that out of 20 things that were priced in terms of gold, the only thing that had a 200 week, long term exponential moving average which was NOT pointing down, was the Shanghai Composite Index. And even then, it was pointing up by only a very slight amount. Everything else, had a long term moving average that was pointing down.

What does this mean?

It means that these things were getting cheaper when priced in Gold over the past 3 years. By the above definition, this is deflation. But only in terms of Gold. Which means that one unit of money, in this case: one troy ounce of Gold, is buying more now, of whatever that thing is, that Gold was priced against, than it was 3 years ago. And this condition exists for all 20 things that are priced in terms of Gold.

A caveat to the above inference, would be to note that the 50 week, short term moving average for most of these 20 things priced in Gold, is moving up. Whilst some other things listed here, has a short term moving average which is moving down, especially certain stock indices. This at best provides short term mixed signals. That is, noise. So it could mean that short term, as in the past few months, these things are getting more expensive in terms of Gold, whilst other things are getting cheaper. A good example of the phenomenon that the shorter the timescale, the more noise one sees. So, if we see noise short term, where some things are not cheaper in terms of gold whilst other things are, then a conclusion would be to stick to what the 200 week, long term moving average infers, if one is inclined to infer, which is that yes, Deflation exists, but only when things are priced in terms of gold.

Take from these charts what you will. This information is meant to inform not lead your point of view.

Here are the charts. Please click on the thumbnail for a larget picture: