The Silent Thief: How to Protect Savings from Inflation

Kieran Smith
April 23, 2020

How can you protect your savings from inflation?

Horror stories of the prices of bread and milk spinning out of control have fixed the concept of inflation firmly in the public imagination. These hark back to the worst cases, like in the Weimar Republic where shoppers were forced to buy loaves of bread with wheelbarrows full of bills, and diners would pay for meals in advance because prices would have risen by the time they finished eating. Monthly inflation reached almost 29,500% at the peak of the Weimar Republic crisis in 1923, with prices doubling every 3.7 days. But even the 2% inflation rates of the modern day will destroy the buying power of your bank balance faster than you might think…

In 1913, USD $500 could buy you a state-of-the-art Ford Model T Runabout. Since then, that same $500 has lost 96% of its purchasing power through inflation, leaving you with enough value to scrape the rent in a small city — never mind buying a brand new car!

Few people live long enough to see such a decline in purchasing power, but even over the last 20 years the effect of inflation is still very noticeable.

During the last two decades, the U.S. dollar has experienced an average inflation rate of 2.04% per year. This might sound small, but it compounds to a staggering 50%. So to get what would have been $100 worth of groceries in the year 2000, you will need to pay $150 in 2020.

In many European countries inflation has been even more extreme, with UK inflation averaging 2.8% between 2000 and 2020 — a rate that compounds to 70% over two decades.

So how can you protect your funds against this silent thief?

Protecting savings from inflation with gold

In the classic example of the Weimar Republic, the devaluation of the currency left citizens sweeping worthless bank notes into sewers and returning to a barter economy where goods and services were swapped directly. Eventually, the government restored the gold standard and the economy stabilized, but the scars that were left eventually led to the rise of the third reich.

If you had held gold instead of cash during the turmoil, you would not only have survived, but suddenly become extremely wealthy compared to your cash-holding neighbours.

But while gold would have protected you against hyper-inflation, would it still guard against the “silent thief” of the lower inflation rates that we see in more modern times?

Let’s take a trip back through the last fifty years to see how gold held up against inflation in the final decades of the twentieth century…

“The Great Inflation” of the ’70s

As the swingin’ sixties drew to a close and President Nixon dropped the gold standard, the West entered a period of sustained currency devaluation.

Inflation ratcheted up through the 1970s and hit a massive 14% in 1980. Most economists attribute this to loose monetary policy, which Wharton professor Jeremy Siegel famously called “the greatest failure of American macroeconomic policy in the postwar period.”

Meanwhile, gold took centre stage, delivering more than 1700% returns over the decade, and peaking at $850 in January 1980. This surge outpaced inflation and made gold the star of the seventies.

But some of the stellar performance can be put down to the artificially low starting price of $35 — as set by the United States Treasury from 1934. And although gold acted effectively as a hedge against inflation, the sudden spike in 1979 and 1980 is more commonly attributed to uncertainty over the Russian invasion of Afghanistan, and unconventional policy actions from the Fed, rather than inflation. 

The price of gold (nominal) plotted against the Consumer Price Index from 1970 – 1980 (First gold futures shown which started trading only in the mid-seventies).

The ’80s

By the early ’80s, inflation had persisted at 3% or more for 15 years, with prices more than doubling in ten years.

But after sitting above $700 for a couple of weeks in 1980, gold returned to trade between $300 and $500. Then as the new decade got under way the demand for gold dropped, and even though inflation continued to ramp up, the price of gold didn’t follow.

If you had chosen to hold gold as a hedge against inflation in the 1980s, you would have lost money to inflation, and watched as the stock market ripped higher.

Gold (nominal) plotted against the Consumer Price Index from 1980 – 1990

The ’90s

As the cold war thawed and Kurt Cobain played on MTV, the world witnessed a period of strong economic growth, low inflation, and relative stability.

Gold’s performance during this period was lackluster, to say the least. The metal ranged for the early part of the decade, before dropping in 1997 and not stopping until 1999. Gold only found a footing in the new millennium, and eventually surged skywards on the recession of 2000 and 2001. 

Gold (nominal) plotted against the Consumer Price Index from 1990 – 2000

Gold: A hedge against inflation the fear of inflation

As shown by gold’s performance during these three decades, the metal’s inverse correlation with inflation is far from perfect.

Gold is not bound to keep up with inflation, and it often doesn’t — like in the 1980s when inflation surged and gold dropped, and the 1990s when gold fell amid steady inflation.

Against slow and steady inflation, gold doesn’t seem to offer any protection. But, the fear associated with high levels of inflation does push up the price of gold.

This was seen in the 1970s when experimentation with monetary policy — along with oil shocks, war, and economic troubles — led to lots of uncertainty and doubt: The perfect recipe for making gold rise.

So although gold doesn’t act as a direct hedge against inflation, it does act as a hedge against the fear and uncertainty associated with it.

As most investors suggest, a well-diversified portfolio, including gold alongside other assets like stocks and bonds, is the best way to protect your savings from inflation in both the short-term and the long-term.

Disclaimer: This content is for informational purposes only and should not be construed as investment or financial advice.

Easily open your Swiss tax free gold vault in under 6 minutes

It’s Free to open a Swiss vaulting account, you can buy and sell gold directly to it instantly.

0 Comments

Trackbacks/Pingbacks

  1. Gold Bug Profile: Ben Davies, Bar9, Simple Wealth Protection - […] Hinde Gold Fund, investors can hedge their capital against the loss in purchasing power associated with paper money. All…

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Gold Bug Profile: Richard Russell

Back in 1960, Russell was the first to recommend gold stocks as an investment option, an assessment that has certainly put a bigger spotlight on that particular industry.

Wealth Diversification is Crucial, Especially During the Novel Coronavirus Outbreak

Putting all of one’s eggs in the same basket during a time like this is virtually the same as throwing money out the window.

Welcome To The New Bar9 Rebranding

To all Bar9 customers, I'm proud to announce the rebranding of Bar nine and a whole new informative front end. As we move into 2020 Bar9's mission is to make it easier for anyone to move in and out of physical hard assets and become a little more bank independent. The...

Silver Bug Profile: Adam Hamilton

Most mining operations have very mixed – and primarily disappointing – results in Q1. That has not affected the price of silver in a negative manner.

Gold Bug Profile: Doug Casey

The name Doug Casey will ring a bell with financial buffs due to his 1979 book. Titled “Crisis Investing”, it quickly rose the ranks to become the number one The New York Times Non-Fiction Best Seller in 1980.

Silver Bug Profile: Rick Rule

When it comes to the silver market, Rick Rule hasn’t shied away from expressing his sentiment at certain times

Gold Bug Profile: Ned Naylor-Leyland

During an interview with Morningstar, Ned confirmed that he remains very bullish on gold for the foreseeable future. He even claimed that there is a good chance to see the gold price move higher, although Ned doesn’t offer potential price targets.

Gold Bug Profile: Judy Shelton

It is interesting to note that Judy Shelton may join the Federal Reserve Board of Governors in the near future. Assuming that will be the case, some very interesting things are bound to happen in the near future.

Unveiling the System Behind the IMF Lending $50 Billion to Member States Fighting the Coronavirus

Currently, it has yet to be determined which options will be explored by the different member states. There is no such thing as free money, not even during a coronavirus outbreak.

Gold Bug Profile: Alan Greenspan

There are many pathways in life which can influence the future of one’s existence. For Alan Greenspan, one pathway of particular influence is called Objectivism.

Gold and Silver Bounce Back as Stock Markets Continue to Struggle

Although the markets aren’t out of the woods yet, things are looking better. There is some positive momentum all around, for a change.

Where is the Best Place to Buy Gold Online?

As far back as Ancient Rome, prospectors would sit aside streams swilling water in pans with the hope of glimpsing the yellow metal. Even today, you can still get your hands on gold in this way, but buying online through a broker is your best bet for a secure, cheap...

Silver Bug Profile: Jeff Clark

Over the past decade and a half, Clark has put the majority of his focus on analyzing the precious metals mining industry. BIG GOLD by Casey Research, a world-renowned publication, has been one of his outlets.

CME Increases Margin for Silver Futures Contracts due to Expected “Larger-than-Normal Price Swings”

The recent margin changes by CME paint an interesting short-term future for silver. Raising the margin requirements seems to be a sign for shorters to not go against the grain right now.

Silver Bug Profile: Keith Neumeyer

Keith indicated that there would be a new bull market for all precious metals in the next few years. So far, 2020 has proven that sentiment correct, although $130 remains a lofty silver price target.

Gold Bug Profile: Eric Sprott

It is also worth noting that Eric Sprott sold his first company – known as Sprott Securities – back in 2011. Interestingly enough, the company was purchased by other staff members.

Gold Bug Profile: Crispin Odey

Over the years, the name Crispin Odey was often named in association with gold and other precious metals. Particularly during the coronavirus crisis, Odey expected the value of gold to move up again.

Gold Bug Profile: Ewan Downie

Since leading Premier Gold Mines Limited since 2006, the company has gone through major growth. Its stock is also trading publicly, further validating its approach to gold and silver.

Gold Bug Profile: Ben Davies

Ben Davies is the co-founder and CEO of Hinde Capital. Founding this company came after building up over a dozen years of experience in financial and commodity markets.

Where to Store Gold: Switzerland vs America

Savvy investors will already choose physical gold to avoid the counterparty risk of futures accounts, ETFs, and other forms of paper gold. But the jurisdiction of gold storage represents another, often overlooked counterparty risk.  When disaster strikes and the...

Translate Blog Post

Article Categories

Blog Stats

  • 112,976 hits

Follow the CEO on Twitter

%d bloggers like this: