What happens to gold/silver if the fed stops inflating?

Economics Economics Questions
1

It seems to be a very prominent viewpoint that there will be hyperinflation, destroying the dollar and causing a flight to gold/silver, making it a great investment right now. My problem with this is that it seems that people think it is just plain NOT possible for anything else to happen.

My take on it is that if the fed and congress stopped inflating and just left it alone, that we would have deflation. Although it may seem unlikely that the fed would stop inflating, it still remains a possibility. We can’t really read Bernanke’s mind and determine his next move, can we?

On top of that, I don’t want to underestimate the incompetence of the fed. Maybe they are planning on inflating forever but perhaps they’ll screw up their plan somehow with the wrong timing or not inflating enough and then a very sudden deflationary collapse happens.

Whatever the case, I’d like to explore this scenario, especially in regard to silver/gold. And the question here is what happens to gold/silver in this kind of an environment? I’m not sure how to interpret what happened during the depression with metals because there was no much government interference and price fixing.

Another thing to take into account in the answers on this is if metals would act differently in short year long depression like after WW1 and a decade long depression like in the 30s.

2

First of all, general deflation won’t happen by itself. If the Fed lets go, all that’s going to get cheap is land, stocks and similar overpriced stuff. But inflation may continue thorugh the fractional-reserve banking system.

Now, considering a hypothetical general deflation, your gold savings won’t be lost. This is because the process implies that commodity prices fall in relation with the dollar. So when you sell your gold and get fewer dollars back, you get more powerful dollars.

Of course, you would have been better off hoarding dollars than gold. In such a situation, holding dollars is a win, while holding gold is a tie. No loss occurs on either part.

On the other hand, if inflation went on, holding dollars would have surely been a loss, while gold would have surely been a tie. No win occurs on either part.

3

To be absolutely correct, I should say that holding gold is a tie if all other things stay equal. I.e. this excludes increasing demand for gold, diminishing gold supply and so on. Otherwise, yes, gold could make this a win situation.