gold investment, silver investment

Precious metals investment terms A to Z

Reflation

Have you ever slept on an air mattress? If yes, you probably noticed that the mattress deflated overnight. It lost air, you couldn’t sleep, so you had to get up and reflate the mattress in the middle of the night, waking up all around.

This is what reflation is about. It means the process of restoring inflation. In macroeconomics, we focus not on mattresses or balloons, but on the price level, but the idea is the same. Reflation is inflation deliberately undertaken to relieve an episode of preceding deflation and bring inflation back to its long-run historical average This is why it usually occurs after an economic crisis or a recession. Reflation policies include increasing the money supply, lowering interest rates, etc. The ZIRP, NIRP and the quantitative easing implemented in the aftermath of the Great Recession are the best examples of reflation policies.

Reflation and Gold

One could argue that as reflation is restoring inflation, while gold is an inflation hedge, reflation should be positive for the gold prices. However, the relationship between reflation and gold is more complex. The key issue here is that gold shines during periods of high and rising inflation, but it is not actually not a hedge against low and stable inflation rates. So, given that reflation is a policy aiming to merely restore inflation to its long-term average level, or to the central banks’ target of 2 percent, it should not be very supportive for the gold prices.

Let’s take a look at the chart below. Although gold soared during the initial phase of the global financial crisis, it peaked in 2011, despite all the reflation efforts of the Fed. As inflation expectations collapsed in 2013, gold entered a bear market.

Chart 1: Gold prices (yellow line, right axis, London P.M. Fix, $) and the inflation rate (red line, left axis, CPI, annual % change) from January 1971 to July 2019.

Reflation and gold prices chart

It suggests that reflation does not have to boost gold prices. It would take a very successful reflationary effort that releases the inflationary genie from the bottle to do the trick.

We hope you enjoyed the above definition. We encourage you to learn more about the reflation – not only about the link between it and gold, but also how to successfully use gold as an investment and how to profitably trade it. Great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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