Gold beats inflation in the long run, but it’s hard to predict how long the “long run” is. A recent report by Credit Suisse looked at all major markets and found that gold has beaten inflation for over 1,000 years. “Gold is as good a store of value as an asset,” said Jim Reid, global head of money markets research at Credit Suisse.
Does Gold Beat Inflation?
#1. Gold is an investment that does well when inflation is high. Since the 1960s, inflation has generally been low in developed countries. During this period, stocks did much better than gold; for example, between 1966 and 2006, gold appreciated by about 1 percent per year after inflation.
#2. The period 1966-2006 was a long time for gold to beat inflation. Consumer price inflation rates have been low in recent decades, but if you go back in history, you will find that inflation was much higher. For example, from 1914 to 1995, the average global inflation rate was 3.19 percent.
#3. “An ounce of gold has always bought an ounce of gold,” said Louis-Vincent Gave, chief executive officer at Gavekal Dragonomics in London and Hong Kong (as quoted in the New York Times). However, an ounce of gold did not always buy an ounce of food. In the United States, between 1914 and 1995, there were several periods when it took an ounce of gold to buy only a pound of copper.
#4. “If you’d bought gold in 1774, you’d be in good shape today,” said James Grant, editor of Grant’s Interest Rate Observer (as quoted in the New York Times). But if you’d bought gold (or silver) in 1774 to preserve your purchasing power, you wouldn’t have had much left after 200 years. The reason is that money is a rival good to other goods and services. Gold is an example: before it was used as money, it was used for jewelry or other ornaments. So gold didn’t increase in value; it was instead displaced from those uses to being used as money. The other goods and services you could have bought with gold increased in price.
#5. Gold is a type of financial insurance against inflation, but purchasing physical gold is expensive, less liquid than other investments, volatile, and risky (It’s difficult to predict how much your investment will grow or decline over time). So you need to ask yourself the following questions: How much would I be willing to lose? How long am I willing to wait before I get my money back? And What are my alternatives?
#6. The Credit Suisse report did not recommend gold as an investment. They advised gold mining companies because they were relatively cheap. Buying mining stocks is a way to speculate on how much gold will cost in the future.
#7. “Gold is the asset class of last resort,” said Andy Smith, an economist at Standard & Poor’s (as quoted in the New York Times). “These [gold bugs] are the modern-day equivalent of people who store their wealth under their mattresses.”
#8. “Gold has done nothing over time, except for some blips,” said Burton Malkiel, an economics professor at Princeton University (as quoted in the New York Times). “It’s had about the best asset class statistics during inflationary periods, except for some periods when it’s done badly. But it has never beaten inflation over any period long enough to prove anything.”
#9. If you hold your gold in a vault somewhere, forget it. The Fed doesn’t care whether you have gold or paper money in your locker (as long as you have some). The only feature that matters is the dollar amount, and that is determined by the Fed each morning.
#10. Buying gold is a no-brainer if you are willing to wait a long time for your money. Gold has been highly volatile. From the 1960s to 1998, it appreciated 3,100 percent in nominal terms (inflation-adjusted), but only 160 percent during 2000-2008.
#11. The challenge of buying physical gold is that it’s hard to find and you pay much more than the spot price (the price in the market at any given time). Gold can quickly appreciate or depreciate by 10 percent or more over a short period. But when you find it, it’s hard to sell because there are so few buyers and insufficient demand.
#12. ” If you buy gold, go to the jewelry place, not to the bank,” says Ben Bernanke, chairman of the Federal Reserve (as quoted in the New York Times). “There’s lots more gold in jewelry than there is in banks. Gold has been around for a long time. It won’t just disappear.”
#13. The best advice is not to put all your eggs into one basket. “You can’t beat inflation by betting on inflation,” says economist Stanley Druckenmiller. “What you can do is bet on your ability to save and to resist the urge to spend. That’s what wins in the long run.”
#14. For example, since 1975, investors have saved $13 trillion in real terms through their investments in government bonds (as reported by Credit Suisse). However, they might have lost $10 trillion if we had used inflation-adjusted figures. In other words: losing 10 percent of your investment after inflation increases it by 200 percent in nominal terms (you got 20 percent more value each year).