WealthCycles.com subscriber isopuhka recently asked, “What about silver’s performance in a real deflation? Silver is mainly used as an industrial metal, and industrial demand falls in deflation. Does this mean that silver’s price will fall? How has silver historically performed in deflation?”
Just as inflation is the expansion of a currency supply, deflation refers to the contraction of a currency supply. Rising and falling prices are just symptoms of an expanding or contracting currency supply. When you get a violent contraction in credit, like during the Great Depression, the credit-based currency supply shrinks. Once the currency supply shrinks, there are fewer units of currency chasing the same amount of goods, and therefore prices fall.
The United States, amongst other countries, is going through the early stages of this very scenario right now. Michael Maloney’s Russia videos explain this impending collapse, and why understanding what deflations are and their impact on economies and individuals is so important. Understandably, people are concerned about their personal investments, and how they will perform during a deflation. In other words, if deflation drives prices down, why would my investment be any different?
Two of the deepest deflationary periods in the 20th century were the Great Depression in the United States and Japan’s Lost Decade (see our piece about it here).
During the Great Depression, the Dow fell 90%, and during Japan’s Lost Decade, the Nikkei fell 82% over a painful 18-year period. But it wasn't just the stock markets that fell—real estate, groceries, wages, and everything else fell too… Well, almost everything.
During the Great Depression, silver made large gains even as the price of nearly everything else fell off of a cliff. This chart shows the inflation-adjusted performance of silver, which made over 80% gains in 1934. But if you were paying attention to the cycles during the Great Depression, you would have made even bigger gains by using your silver investment to purchase stocks while they were dramatically undervalued.
In Japan, silver prices have risen dramatically despite years of crippling deflation. Additionally, thanks to Japan’s deflation, the purchasing power of silver has increased even faster than its rise in price. If we are headed into global deflation, as many signs are saying, then a lot of things will fall in price. But if history serves as our guide, silver won’t lose its luster, even in a painful deflation.