Regular readers know that I favor holding gold when inflation is a perceived threat. Gold is less an investment than a store of value, a means of retaining purchasing power. Gold is not an investment with which to make money. It is a means of protecting money you already have.
There is no certainty regarding an outbreak of inflation of hyperinflation. These are not economic events even though many consider them such. They are outcomes initiated by political action(s). Inflation and hyperinflation are everywhere and always political events.
It has been said that to believe in gold is to distrust politics and politicians. While I have always distrusted politicians, I have not always owned gold. Only because I believe inflation is likely do I use gold as a hedge against a loss in the purchasing power of cash. Nothing can destroy a nest egg or a society faster than high inflation. Hyperinflation is devastating.
Jeff Clark describes what hyperinflation was like in Weimar Germany and how gold performed:
The most famous case of hyperinflation is the one that occurred in Germany during the Weimar Republic, from January 1919 until November 1923. According toInvestopedia, “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 to enlarge)
Inflation was 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.
The implication 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 them.
The level of inflation experienced in Germany is incomprehensible to most Americans. Will it occur here? At this stage no one knows. There is nothing unique about the US that makes it immune to what happened in Germany. Whether it occurs here or not depends entirely upon what the politicians do. Based on their history and character, there is little reason to be optimistic.
Gold is not a solution to investing problems. It is an insurance policy against an inflationary explosion. The higher the probabilities of inflation, the more gold I hold.