Quora Answer: What is the Best Way to Profit from Deflation?

The following is my answer to a Quora question: “What is the best way to profit from deflation?”

A deflation is the opposite of inflation, in which there is a general decline in prices.  In most instances, this is caused by a severe reduction in the money supply or credit.  Austerity measures which cause a decrease in government, personal, and investment spending cause deflation as well.  In such a scenario, there is no real investment safe asset to put money within a country.  If you keep it in cash, there is a danger that the currency will eventually devalue too much, or be rendered worthless by central bank efforts to address the situation.

If you put it in any sort of equity, the investments will eventually become worthless when the yield drops below the cost of maintaining it.  Companies stop making enough money to give out dividends, factories and production lines become cost centres and close, and property prices plummet.  If you put it in fine art and any sort of niche investment, if you cannot dispose of it abroad, there is no secondary market.  For a while, bonds will become attractive as companies seek funding to keep factories, and production lines, open.  But when nobody is buying, no matter the interest rate, the bonds cannot pay out so they become junk.

The only real asset is in physical gold.  But here, the complication is how to store and secure it?  And the purpose of this asset is to be held as a hedge when conditions improve.  In the meantime, you still need massive reserves of cash to spend on necessities.  Long story short, if there is a deflation, move your investments elsewhere, out of country.