Listen to the mainstream commentators, and they will have you convinced that gold is a horrible investment during times of deflation. But this may not be case.
Japan is a modern-day example of how gold can react in times of deflation. Between 1998 and 2013, there was outright deflation in the Japanese economy. The Consumer Price Index of all items in Japan stood at 104.50 in October 1998. It bottomed at 99.20 in February 2013, according to the Federal Reserve Bank of St. Louis.
If we take the mainstream's premise, deflation would have caused a significant decline in gold prices in Japan. Look at the chart below.
When Japan was facing rampant deflation, gold prices in the local currency (the yen) jumped more than 300%, from 34,061 yen per ounce to more than 146,000 yen.
If you bought Japanese stocks (Tokyo Nikkei Average), then you would have lost 14% in this same period.
Thus, gold was a better investment than stocks during Japan's deflationary years. If there is deflation in the U.S., investors may be better off owning gold than stocks, according to what history has shown us in Japan.
In the short term, it will not be surprising if there's deflation in the U.S. economy. This is mainly because the dollar has been rising and energy prices have been declining. These combined phenomena can cause general prices to decline for short periods of time.