Incorrect Inflation and Gold – part 1

Conceptual image - percent growth

Conceptual image – percent growth

Inflation is often cited as a measurement closely linked to gold and silver. There are however some misconceptions as to what this relationship looks like and the dynamics of how it works. In this post we take a look at incorrect inflation and gold.

In economics the definition of inflation is the price increases on goods and services in an economy over a period of time. These prices can increase with different speeds depending on the velocity of money.

Every persons perception of inflation varies depending on what their life looks like and what habits they have. If you travel to work by car for longer distances and thus have high transportation costs or if you have a big family and have high food costs, then chances are that your perceived increase in costs will be higher than someone with another lifestyle.

Typically, inflation is measured through CPI (consumer price index). The CPI index is based on a basket of goods and measured annually. So, the CPI growth shows you what you need to spend to keep a constant standard of living through out of pocket expenses. A high inflation number means that things will cost more and vice versa.

Inflation is of importance to you because it will give you an indication on how much the costs of goods and services are increasing in an economy – thus showing you how much more money you need to spend or make. Ideally, you’d like for your own income to match the growth rate of inflation to maintain a real increase in your wealth or purchasing power.

Inflation is also important because it gives you an indication of how quickly your fiat money is loosing value – becoming diluted – or debased.

Gold is tied to inflation because it holds it value over the long term – in fact better than any other asset.

In his book The Golden Constant, Roy W. Jastram explains it likes this:

“Since the 14th century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.”

So to summarize: gold is not a perfect intermediate inflation hedge but it does preserve value excellently over the long term, and excels during periods of hyper inflation.

The question is if we have any inflation to speak of at all today? That’s what we’re looking closer at in part 2 of this article.


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