Title pretty much says it all.
I’m thinking in particular of gold, but interested in all commodities.
On the one hand, it seems like gold would be a good place to store wealth, given a value as a building block and historic role. On the other hand, if everything that derives from commodities (ie, cars) is dropping, then the building block (both fiat and intrinsic) should be as well… ?
In a deflationary period, money is better to have than an equivalent value of some commodity. That’s because the value of the commodity will be decreasing relative to the value of money. When the money was backed by gold, then having gold in a deflationary period was as good as having money.
Now that money is not backed by gold, gold should just be another commodity. However, there are still people around who think that gold is money, so it probably won’t work quite the same, because these people won’t treat it the same. If there’s enough of them, they’ll distort the natural deflation of the value of gold.
As mentioned, during deflation holding on to money works. This is part of what contributes to deflation. People keep their money instead of spending it on things (commodities or otherwise) or investing. So the owners of such things who need money have to sell at a lower price and the downward cycle is reinforced.
To give a concrete example, during Japan’s “Lost Decade”, the price of gold in Yen fell* from about 6k to 3k. Keeping the money under the mattress would have been a better idea.
The problem with this line of thinking is that - apart from a store of monetary value - gold’s use as a commodity is very limited. It has some limited use in electronics, sure, but cheaper metals do it just as well and are far more common. More than 75% of the world’s gold output is used for jewelry at this point and that might as well be treating it as money.
In deflationary times the only actual reason to hold gold is if you’re stuck leaning the wrong way and need to hold it for the rebound. Otherwise it might be pointless to do so.
It wasn’t a line of thinking and I’m not suggesting gold would be a good place to put your money when deflation hits. I was just saying that gold may not deflate at quite the same rate as other commodities because goldbugs may buy it when they shouldn’t.
Until the crisis of the 1930’s, money was backed by precious metal. Deflation equated, almost by definition, to a rise in the value of gold and/or silver relative to land or labor.
With currencies now controlled by central banks and detached from gold, significant deflation is very unlikely: regulators will inject new money to counter falling prices.
As a rule, I think different commodities must be judged independently on their own merits. Even when prices are “very stable” overall, the prices of individual commodities can fluctuate wildly.
The thing with commodities is - they are commodities. One batch of wheat or oil or steel is pretty much the same as another. So, when economies slow down and people aren’t buying, suppliers will lower their prices to generate sales. When economies begin to become more active, and more people are buying what the commodity makers are trying to sell, they can confidently raise prices knowing that some buyers need what they are selling an are willing to pay the price.
So the best place to put your money while prices are dropping is, as others point out - money. Buy as little as you can, stockpile as little as you can, wait for the recovery. When prices are lowest is the best time to buy, to hold on and sell when prices are back up.
One obvious problem is to know when things are at bottom and it’s time to buy.
The other problem, as alluded to, is the question whether gold behaves like a normal commodity. As alluded to, some people treat it as a reliable place to park money, so in fact demand may go up when purchasing levels and prices of other commodities goes down.
The money supply is controlled by setting interest rates. Lowering them produces more money. The problem is sometimes the rates are near zero or even at zero.
This is what happened to Japan and nearly happened in the US during the Great Recession. This contributed to our climb out of the recession being unusually long.
So it isn’t always an option.
(There was a good size period where the overnight rates in Japan went negative. This happened a few times in the US as well. Scary stuff. Does really bad things to the banking system.)
Lowering the benchmark interest rate is one way to create money. It is the most popular way, but by no means the only way. The benchmark interest rate is only one type of interest rate, other interest rates are set by the market.