Incidentally, the article, which is mercifully short, but punchy, sports the performance of gold against a dozen or so currencies, including the Japanese Yen. That chart, in the bottom left hand corner, will answer the question about whether gold can keep on appreciating in an overall deflationary environment. If I read it right, gold has gone up from 40,000 to 100,000 yens between 2005 and 2009, so that’s that.

What I am interested in is commercial orientated. The chinese consumer is only a small fraction of their economy so its their factories, commercial real estate and PPI that i am interested in because i believe that is where their problems are going to start.

The latest info says that they have 20% vacany rate which will grow this year, 6% PPI, commercial rents are falling and commercial property prices are no longer rising – this could be the warning sign.

Some on the ground info would be great

I find this conceptual framework quite useless, and even pernicious, as it leaves people blind to the thievery perpetrated on the value of their savings and wages. A much more compelling and useful definition, I would suggest, is provided by the Austrian school of economic theory, according to which rising and falling prices are often symptoms and consequences of inflation and deflation. This is a much more complex theory, you might say, but in this case we really do need the conceptual complexity to do justice to the subject.

For this more useful definiton of inflation and deflation, we need to define first two more fundamental concepts:
1. The amount of goods and services present in the economy.
2. The amount of money and credit available in the economy fo the purchase of those goods and services.

With those two concepts, we are ready for these more sophisticated definitions:
A. Inflation is excess money and credit relative to the goods and services of an economy.
B. Deflation is the shortage of money and credit relative to the goods and services of an economy.

Only by working with more sophisticated definitions like these are we able to distinguish between price rises due to excessive money printing and price rises due to a shortage of desirable goods available for purchase. And, intuitively, you have to be able to make this distinction in economic thinking, or risk serious miscalculation.

To illustrate, it is very much a material question whether house prices are rising because of population pressures, or because of an excess flood of easy money and credit into the housing market. If the former, then you would be fairly safe in assuming that your downside risk is fairly well protected, whereas making the same assumption could be disastrous if the cause was in fact the latter.

But notice that the mainstream definition of inflation is incapable of making the distinction. The increase in house prices is taken at face value to BE inflation, rather than being due to inflation, or worse, being due to some other causes than inflation.

Thus, one of the chief advantages of the Austrian approach is that it enables you to make very useful distinctions between potential causes that may underlie the symptoms of rising prices in a certain asset category, because the underlying cause is highly relevant to the strategy you adopt in response. To illustrate, if a person is sinking below the waves, it could be that they cannot swim, but if in fact their leg is caught, the requirements of rescue might have to be entirely different.

And, finally, to answer GB’s question whether gold is going to lose value in a deflationary environment, the answer is by no means certain. As with any other asset category, it may, and it may not. It depends on a whole host of ther factors, and especially the demand-supply characteristics of the class at any given time. The gold market is so incredibly tiny, that even if asset prices in general fall, these falls are most likely to be happening in the leveraged asset categories, and depending on what else is going on in the economy and with the currency, enough money could continue to seek safety in the metals to ensure their continued upward push for a long time to come. As for where gold is likely to go, you need to look and see what the big boys are doing with their money, not what they are saying to you through the media. A classic example is George Soros, who not so long ago declared that gold is the ultimate bubble, only to be found to have been close to trippling his gold exposure over the past six or so months.