Gold as a Hedge Against Hyperinflation: Does It Really Work?

Jeff Clark, Senior Precious Metals Analyst, GoldSilver
OCT 7, 2016

One of the most frightening and personally devastating economic phenomena you can experience is hyperinflation. Unless you’ve lived through one, you have no idea of the havoc it can cause.

The world’s seen it before, many times. But since most recent examples have come from Zimbabwe, Iraq, and other “third world” countries, the idea of it hitting the US or Europe is often scoffed at. 

But is the idea really so crazy? After all, it’s hit some of the world’s most powerful countries too, within the last century. 

What exactly is hyperinflation? Definitions vary, but one of the more commonly accepted is an environment where consumer prices spike rapidly, rising at least 50% per month. That can quickly destroy one’s standard of living—but it can get a lot worse.

And unfortunately, Mike Maloney—who famously predicted the 2008 real estate bubble and crash, among others—shows in the latest episode of his wildly popular Hidden Secrets of Money mini-series that most the world is simultaneously on a path remarkably similar to prior hyperinflations.

To give you a sense of just how destructive hyperinflation has been, the following are drawn from firsthand reports from the Germany’s (or rather the Weimar Republic, its name at the time) hyperinflation of the early 1920s…

Monthly pension checks were not enough to buy a cup of coffee.
 
Banks closed at 11am due to lack of cash to satisfy workers’ paychecks. Eventually tellers went on strike and banks closed altogether.
 
An insurance policy that had been faithfully paid for 20 years bought just one loaf of bread when it was cashed in.
 
A factory worker reported that as soon as he was paid, he and other employees made a dash for the nearest shop and bought anything available.
 
A student had to pay 5,000 marks for a cup of coffee. He ordered a second cup an hour later, but that one cost 9,000 marks.
 
Petty theft became commonplace. Everyone was a potential target.
 
Gasoline became unaffordable. Siphoning become commonplace.
 
Rioting spread, and at its peak occurred daily. Politicians were protected before citizenry.
 
Food shortages spread throughout the country. Starvation grew.
 
Eventually many people were laid off work. The majority of the population found themselves destitute.

You can read the exact same accounts from other hyperinflationary periods, regardless of how prosperous the country or advanced the economy.

If you’re not prepared, a hyperinflation can not only wipe out your savings but literally starve you to death.

Is there really a way to safeguard your finances against such a devastating loss of purchasing power?

History says, “Yes.”

The Only Wealth Protector in Hyperinflation

Sure, gold is widely known as a hedge against inflation and market volatility. But does its value really keep up during hyperinflation?

The historical record shows it does. Gold has not only matched hyperinflation rates but exceeded them.

That same German hyperinflation is an excellent example. It was truly devastating. From January 1919 until November 1923, Investopedia reports “the average price level increased by a factor of 20 billion, doubling every 28 hours.”

This rate of inflation is incomprehensible to most of us. It scarred virtually everyone who experienced it.

So, what did the gold price do during that time?

An ounce of gold traded for 170 marks at the beginning of that period. But by November 1923, one ounce sold for 87 trillion marks.

Here’s what that looks like:

Gold did what it’s supposed to do: its value skyrocketed during hyperinflation.

But it did more than that. The chart can’t show it, but…

Over the five-year period that included hyperinflation, the gold price increased 1.8 times faster than the inflation rate.

In other words, not only did someone holding gold survive during the Weimar hyperinflation, their purchasing power actually increased.

Contrast that with the fact that most people's savings were completely wiped out. Even the wealthiest citizens were turned into poor ones literally overnight—except those that owned gold.

But will we really see hyperinflation in the Western world? According to Hidden Secrets #7, famous economist Jim Rickards and Mike Maloney both agree that we’re on a path headed straight for it. Here’s what to look for…

The Money Illusion

Here’s a fact about hyperinflations most people don’t know, and it serves as a warning to anyone who thinks it can’t happen in their country…

At the beginning of every hyperinflation, it looks like everything is okay. The economy is emerging from a crisis, usually a deflation or some kind of crisis, and things are getting better. People feel more prosperous, because the storm has passed and there’s more money around from the extra currency the government has printed. Markets tend to rise, like housing and stocks.


But it’s an illusion, because prices have yet to adjust for all the extra currency that was created.

Why does it have to adjust?  Because inflation is not just the result of a spike in money supply, but also money velocity. As citizens begin to feel better about the state of the economy, they spend more. That extra money now starts to enter the economy—and prices begin to move higher.

Here’s a snapshot of what this time period looks like.

As you can see, prices eventually catch up to account for all the extra currency that was created. And that sudden spike you see is the direct result of money velocity.

Even though central bankers can control the money supply, they can’t control velocity. And since money velocity is largely a psychological phenomenon, it’s very hard to change it back once it takes hold. This is how inflation has historically gotten out of control and led to hyperinflation.

So, watch for an increase in money velocity. Once that shift starts, the countdown to hyperinflation has started.

And don’t think “it can’t happen here”…

Hyperinflation, the Frequent Rarity 

Most people think hyperinflation is a rare event, but that’s not what history says…

A hyperinflation occurred 55 times in the 20th century.

Since Weimar Germany, there has been a hyperinflation, on average, every three years.

Since the year 1500, approximately 25% of the 617 currencies that went to zero was a direct result of hyperinflation.

It is not such a rare event.

As Mike shows in his newest video, we are on a path that will end in currency destruction. Even though it doesn’t feel like it now, be careful of the money illusion. The actions central bankers have taken and continue to pursue are the same ones that history shows have led to hyperinflation.

It is critical you prepare now. Don’t think you can just buy gold then—it’ll be too late. Bullion will probably not be available on a wide-scale basis, and if it is will be wildly expensive with astronomical premiums. 

You need to buy gold and silver as a hedge against inflation now, before a hyperinflation kicks in.

Will you be on the losing end of the upcoming wealth transfer? Or will you be part of the new rich? 

Watch episode 7 of Hidden Secrets of Money, and see how you can position yourself for the opportunity of a lifetime.