How Does Gold Fare During Hyperinflationary Periods?
by Jeff Clark
by Jeff Clark: Is
the Table Set for a Mania in Precious Metals?
a natural consequence of loose government monetary policy. If those
policies get too loose, hyperinflation can occur. As gold investors,
we'd like to know if the precious metals would keep pace in this
is an extremely rapid period of inflation, but when does inflation
(which can be manageable) cross the line and become out-of-control
hyperinflation? Philip Cagan, one of the very first researchers
of this phenomenon, defines hyperinflation as "an inflation
rate of 50% or more in a single month," something largely inconceivable
to the average investor.
can be multiple reasons for inflation, hyperinflation historically
has one root cause: excessive money supply. Debts and deficits reach
unsustainable levels, and politicians resort to diluting the currency
to cover their expenses. A tipping point is reached, and investors
lose confidence in the currency.
is the key word here. Fiat money holds its purchasing power largely
on the belief that it is stable and will preserve that power over
time. Once this trust is broken, a flight from the currency ensues.
In such scenarios, citizens spend the money as quickly as possible,
typically buying tangible items in a desperate attempt to get rid
of currency units before they lose value. This process increases
the velocity of money, setting off a vicious cycle that destroys
purchasing power faster and faster.
The most famous
case of hyperinflation is the one that occurred in Germany during
the Weimar Republic, from January 1919 until November 1923. According
"the average price level increased by a factor of 20 billion,
doubling every 28 hours."
One would expect
gold to fare well during such an extreme circumstance, and it did
in German marks, quite dramatically. In January 1919, one
ounce of gold traded for 170 marks; by November 1923, that
same ounce was worth 87 trillion marks. Take a look.
(Click on image
at first benign, then began to grow rapidly, and quickly became
a monster. What's important to us as investors is that the price
of gold grew faster than the rate of monetary inflation. The data
here reveal that over this five-year period, the gold price increased
1.8 times more than the inflation rate.
of this is sobering: while hyperinflation wiped out most people's
savings, turning wealthy citizens into poor ones literally overnight,
those who had assets denominated in gold experienced no loss
in purchasing power. In fact, their ability to purchase goods
and services grew beyond the runaway prices they saw all around
One can't help
but wonder how the people whose wealth evaporated in Germany during
this time felt. In effect, they were robbed by the government
they were on the losing end of a massive transfer of wealth. Of
course, there are two sides to the story, as those who held significant
amounts of gold and silver were the recipients.
We can't help
but speculate about whether most citizens dismissed the idea of
inflation during the calm period in 1920-'21. Did respected economists
scoff at the idea that Germany could suffer hyperinflation, just
before it struck? Did some politicians proclaim that "a little
inflation would be good?"
Those who today
argue that our obscene debt levels, runaway deficit spending, and
money-printing schemes are sound strategies and believe they won't
lead to out-of-control inflation might want to rethink those beliefs.
We've seen this movie before: it doesn't have a happy ending.
record is clear on what happens when countries embark on fiscal
and monetary paths today's leading economies are embracing. If gold's
recent price performance is anything like the calm before Germany's
hyperinflationary storm, this is a time to be accumulating more
Keep in mind
that hyperinflation is not a rare event. Since Weimar Germany, there
have been 29 additional hyperinflations around the world, including
those in Austria, Argentina, Greece, Mexico, Brazil, Taiwan, and
Zimbabwe, to name a few. On average, that's one every three years
devastates those who experience it, there is a healing aspect to
it. Since the responsibility for this type of disaster lies solely
at the feet of government, there may be some Darwinian justice to
the way hyperinflation purges the perverse fiscal and monetary imbalances
from an economy. After the Weimar Republic hyperinflation, the second
half of the 1920s was a strong period for Germany, with low inflation
and steady growth.
It's no secret
that many currencies around the world, including the US dollar,
are choosing the path of inflation. If we were to slip into hyperinflation,
there will be disastrous consequences for those unprepared. Given
that the US dollar is the world's reserve currency, the problems
would spread to practically every country on earth. Hyperinflation
will shake people's confidence not only in the US dollar, but in
the paper currency system as a whole.
What will actually
come to pass, we don't know. What we do know is that the measures
to cure hyperinflation include tying the currency to a hard asset
or even replacing it with one. When creditability in fiat money
dissipates, gold may be the only viable option left standing.
investment implication is obvious: continue to accumulate gold.
How much is
enough? Well, how many ounces do you own in relation to your total
assets? Anything less than 5% will not offer you a sufficient level
of protection in a high inflationary environment.
to look at it is this: how many ounces do you need to cover your
monthly expenses? In Weimar Germany, inflation rose uncomfortably
for two years and then pinched harder, spiraling into a destructive
hyperinflation for another two. Consider what it would take to maintain
your standard of living for a couple years instead of just a couple
And don't listen
to any government's ongoing pronouncements of confidence in the
current system, along with the mainstream media's noisy and frequently
inaccurate portrayals of the gold market. (For example, these two
headlines appeared on the same day: Gold Edges Lower as
Worries over Europe Simmer; and Gold Settles Higher on Spanish
Bailout Plans.) In a world awash in ignorance about real money,
if not deliberate obfuscation, you have to study the relevant history,
draw your own conclusions, and stick with them.
shows how gold can perform during hyperinflation. If that worst-case
scenario comes to pass, will the example your family's finances
sets be a positive or a negative one?
Don't let your
family be one of the millions slowly being robbed
by the US federal government's policies that are, among other
things, eroding the value of its dollar. Start preparing yourself
now, and you can not just survive what looks to be ahead
you and your family can thrive. And that, ultimately, is what investing
is all about.
Clark is editor of BIG
GOLD in Casey's Daily Dispatch.
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