Hyperinflation and Gold: What's the Connection?

Economics Economics Questions
1

If one invests in gold now and a Weimar-scale hyperinflation occurs later, why does gold become so valuable? Suppose, for example, that the price of gold climbs to $500K per ounce.

Obviously, if one purchases gold at $1K per ounce, and the price climbs to $500K per ounce, massive nominal profit results. However, what good is this nominal profit if most other prices are also rising?

Does the value of owning gold in a hyperinflation arise because the price of gold rises further and faster than other prices? If so, why?

Is it simply because of the money demand feature of gold?

In other words, does the value of owning gold in a hyperinflation arise because gold is now money - i.e. the most readily fungible commodity accepted in exchange for goods and services - and, as such, the demand for gold so outpaces the supply that each ounce becomes ever more valuable?

EDIT: The above presumes that gold becomes extraordinarily valuable during a hyperinflation. In retrospect, however, perhaps gold does not. Thus, another question is: How valuable DOES gold become in a Weimar-style hyperinflation? What can one trade for with a single ounce of gold?

2

Gold preserves purchasing power, it is not a get rich quick thang.

For example, today an ounce of gold will buy say 100 ten dollar bags of dog food, when product price hyperinflation hits hard that same ounce of gold will buy 100 thousand dollar bags of the same dog food.

3

Thanks. Well put.

With this in mind, something which occurs to me:

Assuming an imminent hyperinflation, the demand for gold as an inflation hedge (and thus gold’s purchasing power) will continually increase from now until immediately prior to the point during hyperinflation at which the economy becomes one based upon barter. When barter is approaching, money velocity increases at a growing rate as people seek refuge in real wealth. Gold will be a primary benefactor of this flight to real wealth, however in ever decreasing increments, as people increasingly come to realize (slowly at first, then increasingly rapidly at last) that holding ANY real wealth is better than not.

In short, gold’s purchasing power will continually increase from now until one of the following scenarios comes to pass:

  1. U.S. hyperinflation arrives and people flee to any and all forms real wealth; or

  2. Investors on balance deem the risk of substantially higher future U.S. price inflation to be relatively low, thus lowering the demand for gold.

Under the first scenario, an increase in gold’s purchasing power appears to have a rather high ceiling.

4

Gold is a hedge against mass inflation - that is 10-20% per year. In a hyper-inflation scenario gold would still be useful - but not as useful as a farm, guns, ammunition, a well and a couple of thousand gallons of diesel.

5

AMEN BROTHER!!!

And mutual defense pact brothers. You can’t stay awake all the time…

And to the original poster - there is no gaurantee that gold would maintain purchasing power. You can’t eat it, or drive it, and it is really inefficient as ammuntion (even if technically acceptable). BUT, throughout human history the market has returned to gold as money. The French fleeing in front of the Nazi’s couldn’t buy gas with paper notes - but you could get it with gold. The first step out of the crippling crisis that breaks down even voluntary order will be direct barter - then indirect barter with market goods - then indirect barter with specie money. Now I don’t think that the aforementioned crippling crisis is inevitable - but with every passing impairment of the free market it becomes more likely.

6

Hehehe, I do not have to…

I finished Bio Chem before dropping college to go to work [;)]

7

"If one invests in gold now and a Weimar-scale hyperinflation occurs later, why does gold become so valuable? "

The US $ is [still!] regarded as the worlds number 1 reserve currency. Gold is number 2 . When , during hyperinflation, the $ [number 1 reserve currency] is rapidly losing purchasing power, and consequently, as a store of value it is also losing value, many people naturally shift $ savings into gold , the number 2 reserve currency.

Still others forgo the transition from $'s to gold , preferring to instead stock up on essential household goods etc. [ See John Pugsley’s “The Alpha Strategy”]

"The above presumes that gold becomes extraordinarily valuable during a hyperinflation. In retrospect, however, perhaps gold does not. "

Historically, gold has become more valuable during hyperinflation, however, you are right to not presume that next time it will behave as it has in the past. The truth is that no-one can reliably and consistently predict future economic events and circumstances.
See: Financial Safety Rule # 1

8

Because any attempt made to get off the $ results in invasion from the US… (Why was Iraq Invaded?)

It does not, the currency becomes worthless, so when measured in gold, the gold appears to be more valuble, but in truth the value of gold has not changed, other than in subjective utility as a medium of exghange.

Prices in gold are still pretty standard, if anything they drop due to more efficient means of production, but with any discovery of new gold, they rise a little…

Butter in 1910 $0.27

Butter in 1912 $0.35

Butter in 1922 $0.43

Butter in 1932 $0.23

Butter in 1942 $0.43

Butter in 1952 $0.77

Butter in 1962 $0.63

Butter in 1972 $0.72

Butter in 1982 no info

Butter in 1992 $3.00

Butter in 2002 $3.99

Well what happened? The price change was nominal, it had to do with the increase in the currency supply that went along with the increase in population, but everything went nuts after 1972, this was where we completely went off the gold standard, an oz. of gold was $58, in 2002 they were $310/oz

Here is my resource for gold price

here is my resource for butter in Morris Co. NJ

Between 1972 and 2002 there was a 534% increase in the price of gold, and a 554% increase in the price of butter

Between 1910 and 2002 there was a 1638% increase in the price of gold, and a 1477% increase in the price of butter

So through inflation the price of gold increased more than the price of butter, the answer is in efficient production of butter and increased government regulation of monetary gold

My analysis is that the gold value does not really change all that much per se, one would be able to buy the same amount of butter with an ounce of gold, or a little more/less depending on production of butter. This is backed up by price increases of Wiemar Republic, with little to no change in commodity prices in relation to gold, this is why gold is a “store of value”, if you have gold you are protecting your wealth. In the case of Hyperinflation in the US, you would have to take a chance, would people accept your oz of gold as opposed to barter for commodities of immediate need? A handful of ammunition, firearm or food has more (subjective) value than an oz of gold in this situation, if you are looking to trade for what you need to survive, commodity barter would most likely be the way to go, but after the initial shock, when the business of trade for profit emerges (as opposed to trade for mere survival) you will be golden.

Pun Intended

9

The United States Dollar (the real Constitutional one) is there

Just buy a few Fifty Dollar Coins and Silver dollars, and your set against inflation.