Could low inflation be bullish for gold?

”It is typically argued that rising inflation is necessary for gold prices to rise. The general idea is that gold is priced in U.S. dollars, and as each dollar becomes less valuable, it takes more of them to buy the same amount of gold. It is along these lines that gold’s dramatic drop over the past few years have been pinned on ultra-low inflation and a strengthening U.S. dollar, particularly after much gold was bought amid the belief that inflation was set to soar as the dollar collapsed.

The idea that inflation is a necessary condition for higher gold prices may explain why gold sellers like Peter Schiff continue to make Rube-Goldberg-ian arguments for why inflation will rise, even as they simultaneously and somewhat contradictorily argue that the U.S. economy is in a recession (contradictory because most people would not pay higher prices for the same goods in a worse economy, which is why inflation and economic growth generally rise together).

However, there’s another tantalizing possibility for gold bugs: Perhaps ultra-low inflation could actually send gold prices higher, through the mechanism of negative central bank policy rates.

In a continuing battle to combat long-stagnant inflation and economic growth, the Bank of Japan has cut interest rates to negative 0.1 percent. This follows similar moves by Denmark, Sweden and Switzerland.

According to currency strategist Boris Schlossberg of BK Asset Management, ‘Negative interest rates have provided a fundamental reason to own gold. Just think about it: If you own gold and it stays stationary for a period, that’s going to beat cash in Japan or Switzerland.’

The basic idea is that gold and cash compete for a similar pool of investors’ money. If the central banks implicitly or explicitly causes cash to yield negative returns, then gold will look better in comparison.”