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If you’ve watched the nightly news even once in your life, you’ve likely heard the term “inflation” mentioned. It’s occasionally discussed as a looming threat, but far too often, the conversation centers on the negative effects it’s already having.
Unfortunately, inflation isn’t a vague concept that only affects certain people. It hits home for every single one of us. And if you’ve invested in gold or silver, you may wonder whether there’s a relationship between inflation and precious metal prices.
The disappointing fact is that this economic reality can affect every single one of your investments. By understanding these correlations and how they affect your assets, it will become clear that precious metals might be your best bet against inflation.
What Is Inflation?
Inflation is the rise in the average price of goods and services that takes place over time. This economic force is nearly constant — with only a few examples of deflation taking place in American history — and it drives down the overall value of currency as it occurs.
To understand the relationship between inflation and precious metals, it’s first important to understand what drives this reduction in the dollar’s value. While there are countless variables involved, economists typically view three factors to be the major drivers behind modern inflation:
- Federal Reserve policies: When the Fed keeps interest rates low, people are more likely to take out loans. This increases demand for goods and services and thus can drive up prices.
- Energy prices: As business and consumer demand increase, energy demand typically has a simultaneous rise. This increased demand creates higher energy costs, and this can drive the inflation rate higher.
- Regionalization: As countries reduce their dependence on imported goods and services, prices often increase due to a reduction in low-cost labor.
Recognizing these factors is key for understanding how inflation and precious metal values interact. This understanding doesn’t really explain, though, how these economic forces affect your wallet and investments.
Fortunately, the basics of inflation are simple to understand. The Consumer Price Index (CPI) tracks the price of goods and services, and this allows us to track the purchasing power of the dollar. If the CPI is 2.1% during a month, it means the price of a $100 item has gone up to $102.
Understanding how inflation and investments interact, however, is a bit more complex.
How Inflation Affects Investments
Inflation will have effects on every asset in your portfolio. This is why experts always recommend that you diversify. To fully understand how gold and other precious metals can protect you, though, you must understand how inflation affects separate types of investments.
Inflation’s Effects on Savings Accounts
Investing your savings in cash may seem like a safe bet, but losing money is also a genuine possibility. This is because inflation devalues currency, so every dollar you have in savings will lose value in time. If your annual percentage yield (APY) isn’t higher than the inflation rate, you’re losing money.
Fixed-Income Investments and Inflation
Treasury notes, certificates of deposit (CDs), and bonds are also a favorite among investors due to their perceived safety. Unfortunately, they usually have a fixed rate of return just like savings accounts. This again equates to you losing money as inflation rises.
Unfortunately, the effect of inflation on your investments becomes even more devastating with long-term bonds. The cumulative loss can cost you big over the years. High-yield bonds create a type of safety net, but these investments are far riskier than their low-yield counterparts.
Inflation’s Effects on Varying Stocks
Just because you’re buying gold bullion or other precious metals doesn’t mean you should ignore stocks. That’s because many companies see higher earnings and revenue as things become more expensive. This means stocks can hold up well against inflation in some instances.
Unfortunately, this isn’t the case in every situation. It’s typically larger companies that see higher earnings during inflation, and even this relationship isn’t particularly strong. This relationship becomes weaker in smaller businesses, and it’s nearly nonexistent among foreign firms.
The Effect of Inflation on Precious Metals
To understand the relationship between precious metals and inflation, you only need to look at the latter’s effect on commodities in general. Since these are physical items, their price typically rises with inflation. This is true for real estate, oil, copper, and more importantly, precious metals.
The fact is that money will always lose value as time passes. This effect is so serious that some countries have stopped producing smaller denominations. A dollar could become almost worthless during bad economic times, but precious metals will always have worth.
The History of Inflation and Precious Metals
There are countless examples throughout history of precious metals performing well during inflation. We even saw this with silver — arguably the most affordable hedge against inflation — during the multiple recessions, international tension, and rising prices of the 1970s.
The positive correlation between gold and inflation, however, has become the most obvious among investors. Just consider the following inflationary periods along with the simultaneous change in the yellow metal’s value:
- 1972-1973: Inflation climbed from 3.4% to 8.7% in just one year. The per-ounce price of gold increased from $63 to $106 during this time.
- 1978-1979: In a single year, the inflation rate rose from 9% to more than 13%. Gold’s value also jumped from $226 to $512 per ounce.
- Early 1980s: Inflation climbed to nearly 1%. The price of an ounce of gold increased by 15 times — to a record of $666.75.
- 1986-1987: A quadrupled inflation rate over the course of one year accompanied a gold price jump of over 20%.
- Mid-2021: Inflation hit a 13-year high in mid-2021, and it was during this time that gold closed in on $2,000 per ounce for the first time.
Key Questions on Inflation and Precious Metals
Even after someone has a basic understanding of how inflation affects the price of precious metals, there are often still lingering questions. Knowing the answer to these questions is key to making informed investment decisions.
Experts have found that the following are some of the most common concerns among individuals considering investing in precious metals:
Does silver hedge against inflation?
Due to its use in industry, electronics, and clean energy sources, investors often view silver as a brilliant investment during growing economies. Fortunately, this doesn’t mean that the metal cannot also serve as a hedge against inflation. This is why it’s often referred to as “poor man’s gold.”
The inflation and recessionary period of the 1970s is certainly a prime example of this, but it’s far from the only one. In fact, the U.S. government could not even meet the demand for silver coins when the economy shrank due to COVID-19. Higher demand is always a good thing for value.
Can palladium and platinum protect against inflation?
When thinking of the relationship between inflation and precious metals, most people focus solely on gold and silver. In reality, both platinum and palladium can also serve as solid inflationary hedges. As physical commodities, they enjoy many of the same benefits as gold and silver.
Are the effects of inflation on investments permanent?
When looking at the effect of inflation on your portfolio, it’s difficult to identify which effects may be permanent. Unfortunately, the damage done to bonds, certificates of deposit, foreign stocks, and Treasury securities could last indefinitely.
This is because short-term damage to these assets can prove irreparable. Foreign companies can go out of business, and the returns you see during inflationary periods will always have less value. And since the norm trends toward inflation, many assets will not recover.
With precious metals and inflation, this relationship can actually prove beneficial. Higher costs simply mean you can get more money when you sell your investment.
Can inflation and precious metals investment co-exist?
In an ideal world, investors would have purchased precious metals prior to high inflation occurring. Having done so would result in much higher returns on priced investments. When inflation is already high, though, is it worth buying silver coins and other bullion types?
Many experts would say yes. One need only look at the value of gold throughout history. Even with fluctuating prices over short-term periods, you can’t ignore its constant upward trend. Precious metals will always have value, so buying even during inflation can prove profitable.
Inflation and Precious Metals: An Investment Opportunity
Inflation is often a sign of larger economic issues, and unfortunately, it can affect every aspect of our lives. Even if all other things remain constant for you, inflation will slowly drive down the purchasing power of your money. This means you have less capital without even knowing it.
While few investments are safe from this powerful economic force, precious metals are some of the few that stand out. Whether you’ve got a box of silver junk coins in your closet or store gold bullion bars at an accredited facility, you own an asset that can stand strong in poor economies.
If you’re ready to take advantage of the relationship between inflation and precious metals, now is the time to act. Visit our Precious Metal Products page today to view all your investment opportunities. With our wide variety, you’ll easily discover something that fits into your financial goals.
