During deflation, the value of money goes up considerably and it becomes inaccessible for many people, resulting in stagnation of the economy. Yet, there are some investment options which can yield good returns in the same period.
In cases where the economic conditions tip the balance of any economy to one side, investing becomes difficult and uncertain. An economic cycle that poses a threat to the confidence and standing of all investors, is deflation. Underwriting, that is estimating a risk is very difficult to come up with the best investments for deflation, and one needs to be creative and analytic.
Economic deflation is an economic cycle or a stage where the general price levels decline, which is caused as a result of reduction in the supply of money and all kinds of credit (debts and loans). The cycle is characterized by a stage where a single dollar becomes very much valuable. In the short run or in the initial stages of the deflationary cycle, the prices that go down tend to have a positive effect on the economy. However, as the deflation progresses or prolongs, it can have a negative effect on the economy, which is known as deflationary spiral.
During deflation, since the value of money increases, the general demand in the market goes down, which brings down the rate of supply. A decreased supply means a lower rate of production, which eventually leads to stagnation of all the economic activities. This cycle makes the hunt for investing options during deflation very difficult.
The best investments during deflation should be thoroughly researched and need to be unique.
In the initial phases of deflation, the strategy is to exploit the drop in the level of prices. In such a scenario, buy some assets such as furniture, electronics, etc. This process of buying assets, should be, however, controlled, and one should not blow life savings on them. Apart from that, one should make sure to buy assets in the initial phases of deflation. Purchasing assets is the best low risk investment.
The price range of metals depends upon the demand and supply forces for the metals. During deflation, however, the demand falls as a result of the lack of sufficient economic activity, leading to the fall of gold prices. One can purchase gold and sell it later on, after the economic conditions improve. Apart from trading the metal itself, gold mining, stock investing, and various gold funds can also become great investments, and can be sold at a hefty price at a later stage. Apart from gold investment, investments in silver, pearls and diamonds can also prove to be profitable.
In cases where one wants regular returns, investing in energy can become one of the best investment options. In such a case, the returns will be assured as the demand and supply for energy is rarely affected by deflation. Stocks of energy companies, if purchased at the perfect time, can yield a genuine profit upon sale. Once the economic conditions get better, these stocks can be sold at a handsome profit. Energy resources are also good for long-term investment.
In accordance with the spiral effects, the economic growth and development comes into a certain stage of stagnation, and the interest rates drop down. The offshore emerging markets in such a situation tend to show an upward projection of economic growth. Here, foreign direct investments tend to become more profitable.
There are other kinds of investments such as bonds, fixed annuities, and insurance polices, which have a guaranteed return on investment (ROI). Investing in such financial plans gets a certain rate of return, which may not be very steep but satisfying and is also assured. However, avoid investing in mutual funds, or any plans, instruments, policies, and bonds, that subject you to any market risk and index.
The key to exploit deflationary cycles is to invest at low-cost points that are bound to go up, and then sell the same at a higher price.