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April 24, 2021

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Gold and Inflation - What has History Taught us?

While prices throughout the economy have risen significantly over the years, they’re not the only element of growth. Fears of inflation have been rising too, as more and more households are feeling the effects of higher prices. From everyday essentials to gas and consumer discretionary, prices have gone up and up while incomes have remained the same.

Even the excessive spending of fiscal stimulus been in vain. In fact, that money created out of thin air is what’s responsible for the price increases we’ve seen to date. And as the buying power of each dollar gradually continues to decrease, those households receiving stimulus relief are seeing the money buy less each time it has been administered.

Many investors are wondering whether the savings they have worked decades to build up will be safe enough to retire. With the Federal Reserve intent not just on ignoring inflation, but also waiting many months to see just what these effects of higher inflation will have on the economy. Maybe you'll find yourself one of the Fed’s testing dummies, watching in disbelief as inflation erodes the purchasing power of your assets. By the time the Fed intervenes to stop it, it may be too late to undo the damage with no possible recourse for the short term.

This isn’t the first time inflation has shadowed over our country, and it won’t be the last. Persistent inflation over time has been problematic for more than a one hundred years, and periodically the rate of inflation’s rise increases. Looking back into history, what lessons can we as investors learn from inflationary crises to defend against impending inflation?

For more information on Precious metal investing - read Why Precious Metals?

Does the FED want Inflation?

The first thing we need to ask is why would the FED want inflation? For years it has zoned around a 2% annual rate of inflation. It considers that to be a moderate - low level of inflation, never mind that it means that prices nearly quintuple during the course of an average Americans working life.

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But Fed policymakers also stick to ancient trust in the Phillips curve. The Phillips curve is an economic theory that suggests there is a relationship between inflation and employment rates. According to the model, higher inflation boosts economic growth, resulting in more job creation. If the economy overheats, inflation needs to be reduced, resulting in job losses and higher unemployment. It doesn't take a generous amount of research to deduce that people will fall through the cracks. 

It’s a simplistic hypothesis and one that was disproven after what is know as the Stagflation, a movement in the 1970's. Where both inflation and unemployment rose. Yet it remains the model that underpins much of the thinking of central bankers today. And because the Fed has a double mandate to cultivate full employment and stable prices, the Fed operates as though the Phillips curve poses fundamental relevance.

Listen to any of the Fed’s policymakers address this issue, especially the doves, and you’ll hear them talk about the need to boost inflation in order to ensure that the labor markets are able to recover The Fed announced in mid 2020 that it is prepared to permit inflation to shoot above 2% for a long period of time in order to achieve a long-term 2% average. And Fed policymakers continually talk about letting inflation run hot as long as the job market is growing. The Phillips curve may have been shown to be useless during the 1970s stagflation, yet the Fed continues to keep it in modern conversation.

Gold and the 1970's

The stagflation era during the 1970s shocked the country, and it really shook up the economics conversation. Keynesian economists were floored by the fact that both inflation and unemployment were rising, something that the Phillips curve said was not a possibility. Other economists such as Milton Friedman predicted the stagflation, as they weren’t convinced of the Phillips curve’s oversimplification of the relationship between inflation and employment.

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Friedman believe that any relationship between inflation and employment could only be correlated in the short term, so that while higher short-term bouts of inflation could boost employment in the near term, over the long run there would be little positive effect, if any. Today we could be seeing a return to 1970s-style stagflation, with all the economic risks it poses.

The unemployment rate at the inception of the 1970s was just under 4%. It rapidly elevated to 6%, peaked at 9% in 1975, and remained around 6%  toward the latter half of the decade. The rate of inflation rose too, starting the decade at just below 6%, moving a whopping 11% by 1974, dropping back to under 6% in 1976, and rising back to over 11% at the end of the decade. It was an unusual event that perplexed experts and policymakers. 

Wondering how investments performed in that era? If you were invested in stock markets, your performance wasn’t that great. The S&P 500 grew from 93 points at the beginning of 1970 to just under 108 points at the end of 1979, an annualized growth rate of about 1.5%. With inflation being so high, real returns were deeply negative. Talk about losing money to inflation.

Precious metals, on the other hand, outpaced the market. Gold started the decade at around $35 per ounce, and ended it at $524 per ounce, an annualized growth rate of 31%. Silver’s performance was even better, rising from $1.80 an ounce to $32.20 an ounce, an annualized rate of growth of over 33%. Both of those figures were well above the rate of inflation.

Will the History of Gold See a Repeat?

The big question in front of us today is whether our current economic situation will mirror that of the 1970s and, if so, for how long? If you’re a believer in the cyclical nature of history, there’s every indication that we could be entering another horrible period of economic stagnation.

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There were roughly 45 years between the Great Depression and the 1970s stagflation, and roughly 45 years from stagflation to the time of your reading this article. You could argue that we’re due for a decade of high inflation and economic stagnation. Trillions of dollars lost to an old formula.

If that ends up being the case, will the coming stagnation look like the 1970s, which saw markets long overdue for a recovery in the early 80's and go on to a two-decade boom, will it look more like the Great Depression, from which the economy didn’t recover a quarter century or will it look like something entirely different and novel? The future of your wealth security could depend on what the future holds and how you plan for it.

More and more investors today are growing distrustful about stock markets. Nerves about higher inflation and higher taxes in the future, and are adopting a pessimist sentiment about the direction of the economy. And that’s why more investors are turning to gold and silver to protect their assets.

These investors know that gold and silver have performed well during uncertain times. They know that gold and silver saw phenomenal growth during the 1970s stagflation. They are aware gold and silver outperformed stocks during and after the 2008 collapse. And they know that there’s a very good chance that gold and silver will continue to outperform stocks during the next crisis if history is anything to go on.

You’ve worked hard for decades to give yourself the chance to enjoy retirement, don’t let your dreams get blindsided by high inflation and a weakening economy. Start taking steps to protect your hard-earned savings.  Review out top recommendations to learn more about how you can benefit from gold and silver.

For Gold and Silver IRA account companies we recommend Augusta Precious Metals. Claim your spot in the Augusta Precious Metals free webinar to get your personalized financial strategy consult.

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Nathan Rosevear

Nathan offers insights and reviews around the highest rated precious metal IRA specialists. He is an investor in gold and silver industry.
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