As the US economy is just finding its way out of a deflationary period, could hyperinflation be a reason to buy gold? According to Paul Tustain, the founder and CEO of BullionVault, the world’s largest store of privately-owned gold, it is a very real possibility.
Joining experts such as Marc Faber, Christopher Wood, Robert Fisk, Anthony Bolton, Niall Ferguson and Jim Rogers, Paul presented his thoughts on gold investment and hyperinflation to a group of finance professionals at meetings in Tokyo, Hong Kong and Singapore. Illustrating a scenario of gold’s tight supply painted against devastating hyperinflation, Paul envisioned a situation that could literally destroy the middle class by doubling the cost of living over a period of five years.
Many people wonder if hyperinflation is even possible, given the efforts of the Federal Reserve to control the growth of the economy. Much of the concern over hyperinflation centers around the recent attempts to manipulate the money supply and interest rates. As the Fed and other national banking concerns worldwide dropped interest rates to near zero and funneled vast sums of money into stimulating the economy, the concern is a strong reversal that creates inflation that can’t be reined in, creating hyperinflation.
Phillip Cagan, whose 1956 book, The Monetary Dynamics of Hyperinflation outlined the conditions that can trigger hyperinflation as:
1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power.
2. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.
3. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short.
4. Interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years approaches, or exceeds, 100%.
Criteria 1 is already true for many people with gold investments, and criteria 3 can be tied to the way credit cards and other lenders currently operate. Does this mean that hyperinflation is here? No, but investors should not disregard its possibility.
Of itself, hyperinflation is not a specific reason to buy gold; investors should buy gold to increase their wealth and to provide a hedge against inflation or any other economic hardship. In the past, gold has been a solid investment and many people have protected their financial stability with consistent, sustained investment in gold.
Steven Martin
Senior Gold Specialist - Buy-Gold.org
