How Does Gold Fare During Hyperinflationary Periods?

Posted on by The INO.com Team

By Jeff Clark, Casey Research

Inflation is 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 extreme scenario.

Hyperinflation 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.

While there 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.

"Confidence" 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 to Investopedia, "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.

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.

The historical 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 gold.

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 or so.

While hyperinflation 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.

Again, the 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.

Another way 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 months.

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.

This example 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.

21 thoughts on “How Does Gold Fare During Hyperinflationary Periods?”

  1. Thanks for answering my question everyone. I noticed a few of you realized that Gold tanked along with the market in 1929 and then further in the 1930's it was confiscated from the people and then a fixed price per ounce set. I compare what the market and economy has done from 2007 to current to the 1930's and I hope I am wrong but if we did our trading on hope where would we be. LOL

  3. The chart of gold from 1929 to 1933? I don't have a diagrammatic chart, but here is a table of the average gold prices each year from 1833 to 2011.

    http://www.nma.org/pdf/gold/his_gold_prices.pdf

    Just input the values into a spreadsheet like Excel, and make your chart. Basically, "the chart" doesn't do much between 1929 and 1933 because the US gold price was fixed at $20.67 per ounce until 1933, when, after the US government no longer allowed private ownership of gold, they raised the fixed price to $35.00 per ounce. It stayed at that price until the 1960's, because the US government stood ready to buy or sell gold to maintain the price in a narrow range around that price. You all know the history of the gold price after that.

  4. We have been through all this before. Andy Jackson said that paper, or "fiat" money was bad because the politicians would print too much of it to get re-elected. Smart man, Andrew, fighter of indians and invading British, and later president, it would trouble him to know someone put him on the 20.

  5. The biggest and most profitable gold mine in the United States during the Great Depression was Homestake Mining which rose from $65 per share in 1929 to more than $300 per share in 1933 and then climbed to a $480 bid and $534 ask in December of 1935. It was the highest-priced, most active stock on the New York Stock Exchange.

    During the next six years after the 1929 stock market crash, Homestake Mining paid out a total of $128 in cash dividends. Its dividend in 1929 was $7 per share which them climbed to a staggering 1935 dividend of $56 per share.

    One of Homestake’s most notable stockholders was publisher William Randolph Hearst — whose father, the late Senator George Hearst, bought the Homestake claims for $70,000 and incorporated them in San Francisco in 1877.

    Homestake Mining earned a compound rate of return of 35% per year from 1929 thru 1935, excluding dividends.

  6. As you refer to "government" above, please remember exactly who that is: the Repubs, Dems, and a few Independents we the people elect to Congress - which has been controlled for the last two years by Repubs running the House, and blocking the Senate by requiring 60% of the Senate vote to get anything passed. Mr. McConnel stated two years ago that the PRIMARY goal of the Repubs was to keep Pres. Obama from being re-elected NOT to "restore" fiscal sanity" or get the economy heading upward.

    So, Repubs, you may get your #1 goal, but have you really served your country?

    1. Padrum lets not forget who caused the banking crisis led by Barney Frank and the Aristocrats sorry meant to say Democrats it slipped or maybe it fit.

    2. PADRUM, FOR THE FIRST TWO YEARS, OBAMA HAD TOTAL SUPPORT FROM BOTH THE HOUSE AND THE SENATE. THE ONLY THING HE ACCOMPLISHED DURING THAT TIME WAS PASS SOCIALIZED MEDICINE. HE HAD TWO YEARS TO CONCENTRATE ON A JOB PLAN TO GET THE COUNTRY OUT OF THE FINANCIAL CRISIS. ALSO, JUST SO YOU KNOW THE SENATE HAS 60 SUPPORTIVE DEMS/INDEPENDENTS WHO CAN GET ANYTHING PASSED THEY WANT TO. SO DON'T BLAME THIS ON THE REPUBLICANS. JUST STOPPING THIS ADMINISTRATION FROM FURTHERING THEIR SOCIALISTS LEANINGS AT THIS TIME IS SERVING OUR COUNTRY. THE SENATORS IN MAJORITY ARE SEPARATING THEMSELVES FROM OBAMA AND NOT SUPPORTING HIS VIEWS AS THEY WANT TO BE RE-ELECTED.

    3. OMG! One party wants to get the other party out of office!!! OMG!

      Dumb, cry baby liberals do not understand this is the way politics work. Padrum, the country spoke in 2010 during the Congressional elections - a thorough rejection of Obama's policies and leadership. The country spoke again in 2012 with Scott Walker's recall election.

      Obama is following the path of Bill Clinton. HOWEVER, Clinton was enough of a politician to move to the center and keep his job. Obama is an idealogue. If you examine the facts honestly, you will see Obama is the problem, not the House or Senate. As a reminder, Obama had super majorities during his first two years and did not fix anything. I can only assume with four more years that he would continue out of control deficit spending. Where does it end? Hyperinflation like the article said? I do not want to find out...

  7. As history is good for getting some rough idea about future possibilities, but there are many other related factors, which defers with historical events, so it is quite meaning less to copy history and pest it as a future perspectives. Each and every time, there are different factors, conditions, and absolutely different forces, linked to overall position for any individual or global economy, so results is obviously quite different, rather then duplication of history, same to same, as it is.

  8. scrap prices of gold and silver ,are lowish compared to the pysical prices silver 12£ buying 14.£90 selling troy ounce ,prices for a gram of gold vary up to 29£a gram for 22crt gold around 12£ a gram for 9crt jewellers buy also diamonds and other precious metals ,mine`s that cast rough ingots these have to be refined due to inclusions of lesser metals than gold ,its a buy.

  9. Everything that was written rings true ,A great article .around four days ago i had a conversation with a dealer who buys and sells gold and silver .gold 14£ a troy ounce 9crt 29£ 22crt a troy ounce .selling , silver buying 12£a troy ounce ,selling 14£90 a troy ounce .this is scrap gold and silver ,dealers buy many ounces every day and it is still coming on to the market .

  12. Hummm, 1920, 1921 a Depression that is never talked about. The president and congress did nothing. They let the free market work itself out of the Depression. Companies went out of business, Companies were baught for pennies on the dollar, merged, bankrupted, etc. One year later the Roaring twenties started to kick in. That is why they named the 1930's the Great Depression. What happened was Wilson and FDR and now Obama minipulated and are minipulating the markets in everyway to try to ease the pain. It did not work then and it won't work now. It will only draw out to a longer depressionary perioed of time. I compare today like the 1930's depression and does anyone know how gold preformed during those years? That is the time period I would like to compare the preformance of gold with today. the 1920's were not a period of time the free markets were being manipulated. Does anyone have a chart of Gold from 1929 through say 1939?

    1. jp, totally agree with you, and I would like to see the chart of God from 1929 through 1939 as well. Good job!

    3. You can't get a chart of the gold price through 1939, because Roosevelt made it illegal to hold gold, forced everyone to sell their gold to the government at $21/oz, and then promptly devalued the U.S. Dollar by 40% and fixed the price of gold at $35/oz. I think he did that in 1933, but I could be wrong.

    4. Dear JP and gg,
      I would also like to see the chart for GOD (see gg's reply email to JP) from 1929 through 1939, as well. I wonder how GOD did during those years? He/She was certainly busy trying to take care of all the unfortunates that were victim's of the 1920's irrational exuberance. I remember that he/she helped my parents meet at a dance for the CCC boys planting trees in the UP of Michigan. I guess during this downturn that could never happen, because gov't is helping the banks, rather than the individuals, like in the 1930's.

      But, the truth is gold was illegal to own during that period of time (consult your history books). The gov't made a tidy profit doing that, but also shut down the speculation in the gold market. Don't be naive, or appear naive. Do your homework. And, thank GOD there's a Hades.

      Something to think about, Cherubim

      1. So sorry for my typo, but I sure liked your reply. I do thank God for blessings we have everyday.

        thank you, Cherubim

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