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How gold performs during periods of deflation, disinflation, stagflation and hyperinflation

Gold as a disinflation hedge

The United States (2000s)

“The inability to predict outliers implies the inability to predict the course of history. . .But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer — our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.” –– Nicholas Taleb, The Black Swan – The Impact of the Highly Improbable

Just as the 1970s reinforced gold’s efficiency as a stagflation (combination of economic stagnation and inflation) hedge, the 2000’s decade solidly established gold’s credentials as a disinflation hedge. Disinflation is defined as a decrease in the inflation rate over time (or a constantly low inflation rate), and should not be confused with deflation, which is an actual drop in the price level. Disinflations, as pointed out above, are close cousins to deflations and can evolve to that if the central bank fails, for whatever reasons, in its stimulus program. Central banks today are activist by design. To think that a modern central bank would sit back during a disinflation and let the chips fall where they may is to misunderstand its role. It will attempt to stimulate the economy by one means or another. The only question is whether or not it will succeed.

Up until the “double oughts,” the manual on gold read that it performed well under inflationary and deflationary circumstances, but not much else. However, as the decade of asset bubbles, financial institution failures, and global systemic and sovereign debt risk progressed, gold marched to higher ground one year after another. As events unfolded, it became increasingly clear that the metal was capable of delivering the goods under disinflationary circumstances as well. The fact of the matter is that, during the 2000s even as the inflation rate hovered in the low single digits (See chart, green area], gold managed to rise from just under $300 per ounce in the early 2000s to just over $1800 per ounce by 2011 — a gain of nearly 650%. Since then, gold has taken a breather. As this essay is written, it is trading in the $1200 per ounce range — still up over 425% in the new century.

overlay chart showing gold's performance during the disinflation period following the 2008 financial meltdown

The world’s central banks, historically at odds with each other with respect to currency policies since 2008, have teamed up to deliver ever larger doses of monetary stimulus that go far beyond ordinary tinkering with interest rates. Money printing has become a global undertaking – a phenomenon the consequences of which are yet to be determined. All in all, the 21st century ushered in a new era for gold, one in which it filled a hole in its resume. Now gold has come to be viewed as an effective hedge against one of the contemporary economies’ most nettlesome problems – chronic disinflation and the systemic financial risks it periodically imposes.

–– Michael J. Kosares

BlackSwansYellowGold Series
Gold as a deflation hedge
Gold as a disinflation hedge
Gold as a stagflation hedge
Gold as hyperinflation hedge
Gold as the portfolio choice for all seasons
A chronology of panics, mania, crashes and collapses

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A word on USAGOLD – USAGOLD ranks among the most reputable gold companies in the United States. Founded in the 1970s and still family-owned, it is one of the oldest and most respected names in the gold industry. USAGOLD has always attracted a certain type of investor – one looking for a high degree of reliability and market insight coupled with a professional client (rather than customer) approach to precious metals ownership. We are large enough to provide the advantages of scale, but not so large that we do not have time for you. (We invite your visit to the Better Business Bureau website to review our five-star, zero-complaint record. The report includes a large number of verified customer reviews.)

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Disclaimer – Opinions expressed on the website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset-preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes and, as such, USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here. (Please see our Risk Disclosure here.)

Michael J. Kosares is the founder of USAGOLD, author of The ABCs of Gold Investing – How To Protect and Build Your Wealth With Gold [Three Editions], and the firm’s publications editor.