All the money appears to be on inflation! Gold and oil.

What happens if we get deflation. When the U.S goes into recession and the BRIC economies are unable to take up the baton, the price of oil and possibly gold will fall. Gilts will be the place to be.

Discuss.

Given the rate at which central banks are 'injecting liquidity' (ie. printing money) I don't see deflation happening any time soon. At the end of the day, they can print all the legal tender they like, but they can't print Gold, oil or food. If we do get any deflation it probably won't be until 2010 ish - and it won't be as severe as the inflation we're just about to have (it won't restore the value of money to what it was before the inlfation began).

I woudn't touch Gilts with a bardgepole. Some lucky 5hits bought 30-year bonds at the tale end of the 70s/early 80s when they were paying more than 25%. Since then there has not been a good time to buy Gov't bonds.

Good points,

They can't print oil.

What if the world goes into recession (depression) who wants oil?

who can afford food?

Yes People might buy gold.

With the credit crunch people can not borrow to spend!!!

The stock markets have plunged. Gold has fallen and Gilts have gone up.

Are the markets telling us that deflation is coming?

Is the gold price just a speculative bubble?

If I had all or even some of the answers I would be retired somewhere warm by now!

If you buy index-linked gilts you get protection whatever the level of inflation. In fact deflation is best as there is a stop-loss on them - they do not go down in value in any year in which there is deflation. This means, ironically, they outperform most assets during deflation. If you believe deflation is very likely then you can up your returns by mixing in some fixed-interest gilts but they seem poor value at current levels and I would still go mostly i-l flavour.

Of course, even i-l gilts are still a form of debt and a bit of gold is still worth having as insurance against default.

But the central banks aren't printing money - they're injecting liquidity, but it's on a rolling basis that sees as much liquidity drained. In fact that enormous injection by the ECB before Christmas - €500 billion - happened in the same week when the previous series of injections was drained by an even greater figure.

The only pumping of the money supply is through credit privately created by money centre banks - and that's slowing down.

Future projections on inflation? Watch US 10 year treasury yields: going doooown.

The fiscal stimulus in the US is inflationary - new govmnt debt to be dropped onto the eager masses. But I agree the inflation/deflation battle rages with no clear winner yet.

Most people seems to be assuming an inflationary depression. Inflation is the assumption made by most observers, but not by all, by any means. There are of course a substantial body of commentators who anticipate a DEFLATIONARY depression, which we are already beginning to see, similar to the West in the 1930's, or Japan in the 1990's.
Banks have removed vast amounts of credit in the form of mortgages and bank loans, and this is DEFLATIONARY. The current crisis is clearly spreading into the wider economy, and businesses are now having increasing trouble borrowing money.
One look at the retail sector does not give the impression of inflation! On the contrarary, there are endless sales and price cuts. In the city there are increasing layoffs, probably soon to spread to banking, estate agents, and possibly other businesses.
There is inflation in oil and food, about which nobody is in dispute.
Right now it is a matter of opinion which of the two forces of inflation and deflation will win. My personal belief is that we will expereince a massive deflationary recession leading to worldwide depression, and huge unemployment, similar to the 1930's.
In order for the rising food and oil prices to lead to an inflationary recession, wages would have to rise dramatically for the necessary wall of money to be available.
Contrary to commonly quoted wisdom, governments and banks do not print money, they lend it. But right now the banks are NOT lending money, so where is all this supposed cash coming from? Actually M4 is falling dramatically right now, supporting deflation rarther than inflation.
The Japanese central bank lowered interest rates to 0% and encouraged borrowing from corporations and individuals, but this did not prevent a massive deflation of stocks and real estate. My belief is that we will see deflation in the West, but the jury is out on that, and it is too early to be sure. I am not sure myself, but, to me, it certaily looks more like deflation at the moment.
Any thoughts? Best wishes,
Housing Bear.

This is most interesting! I had assumed that if RPI became negative, as you might expect in a bad delfation, that Index Linked Goverment Bonds would reflect this. Am I wrong? I hope so!
The other problem is that you cannot buy much of them in the 2 issues at 15K each. Any ideas on that? can you buy them though a fund?

I know a guy who owns a chip shop. For several months he has been complaining about the price of cod.

Recently the "fishman" has told him that 7 out of 10 shops he supplies have been quite and guess what the price of cod has fallen 30%!

Daily evidence and opinion is discrediting the decoupling theory ( the BRIC economies will take up the slack when the U.S. goes into recession) The price of oil will therefore fall, indeed recent future trades are predicting lower oil prices. Commodities must follow oil down along with inflation. Who knows about gold? We will then have deflation!!!

If you want index linked stock why not buy Gilts?

As a proud owner of both 3-year and 5-year i-l certs I can confirm they do not go down in any year there is deflation - it's in the small print that comes with the certs. But, yes, you are correct that there is a 15K limit on each flavour. But be aware that new issues come out regularly and you can invest more as they emerge. Also you can 'roll-over' certs when they mature - including interest earned to date. So over a few years it's possible to build up a substantial holding, more so if (like me) you are one member of a duopoly in which each person has a seperate allowance. Admittedly this may still be inadequate if you are looking at investing millions but fortunately this is not a problem for me :-)

UM

Are perceptions shifting?

http://www.ft.com/shortview

Are you confusing NS&I Index-linked Savings Certificates with HM Treasury Index-linked Gilts?

The former are deflation proof and non-tradable.

The latter are openly traded, e.g. on the LSE, and will rise and fall in price according to inflation/deflation expectations and market sentiment.

good point. I've only ever bought the saving certs so cannot speak knowledgeably about the tradable gilts. If you buy the latter at issue and keep them to redemption (i.e. no trading) and in the interim there has been deflation, do you lose money - i.e. do they track the deflation or do they have the same stop-loss (on maturity) as the saving certs? I would have thought it would be impossible to sell them during deflationary times if there was no stop-loss. Genuinely curious.

rgds
UM

My belief is that we will see deflation in the West, but the jury is out on that, and it is too early to be sure. I am not sure myself, but, to me, it certaily looks more like deflation at the moment.
Any thoughts? Best wishes,
Housing Bear.


Could not have put it better myself Housing Bear.

How about reading this in the Telegraph. Second great article in three days from Ambrose. Anyone for Gilts?

http://www.telegraph.co.uk/money/main.jhtm.../cccomms104.xml

Yet another corker from Ambrose.


http://www.telegraph.co.uk/money/main.jhtm...7/ccview117.xml