Why Gold isn’t a Cure-All During Hyperinflation
Posted June 03, 2021
House prices are going up, but only if you’re measuring them in dollars. Measured in gold, they’re falling.
This is how you can have both inflation and deflation simultaneously. Prices can go up in paper currency while they go down in real money, gold or silver.
In the ‘90s, savvy Romanians got rich during hyperinflation because they broke the habit of measuring things in terms of the paper currency.
Once they realized what was happening with their savings, they learned to measure things against assets. That way, they could anticipate what would rise in value as the currency fell.
And, eventually, they found ways to bypass the volatility of the national currency entirely.
The Path to Collapse
Yesterday, we introduced a vlogger named Lehel. Lehel grew up in Romania during the country’s bout of intense hyperinflation. He saw firsthand what hyperinflation does to a country and he’s now seeing the same signals cropping up in America.
Romania’s hyperinflation story is a bit different from places like Venezuela, Zimbabwe, and Germany… but there are still lessons to go around.
Lehel laid out Romania’s timeline of events. Perhaps you’ll also notice a few similarities:
→ The cost of raw materials starts to rise
→ Other things began to rise in staggered waves
→ Supply chains started breaking down
→ Salaries rose (a little) to compensate for the “new normal”
→ Rationing began at the supermarket
→ The value of savings was destroyed
→ Loss of confidence in everything
When we talk about hyperinflation, the first thing that typically comes to mind is gold. But, says Lehel, gold isn’t exactly fool-proof.
There’s one thing to keep in mind.
Why Gold Isn’t a Cure-All
When cash-rich people in Romania began realizing what was happening to their savings, they began buying up assets.
The (unofficial) price of precious metals rose in paper currency, but then, after a while, normalized when the price of basic necessities began rising exponentially.
Though gold was up when compared to paper currencies, it actually started to go down compared to staples.
Lehel: “Nobody sold, nobody bought, nobody did anything except scrambled for food.”
Yes, says Lehel, gold is a good bet: “If you’re betting on gold and you’re buying and storing gold now,” he says, “I think it’s a really good idea against inflation and hyperinflation.”
But, there’s a caveat: You should plan for the long haul. During hyperinflation, it’s true that you probably won’t be able to get precious metals for any price. And, paradoxically, if you need to sell, you might not get as much as you might think when compared to other assets.
The Paradox of Precious Metals
Granted, Romania isn’t perfectly analogous. In the ‘90s, buying investment-grade metals was illegal. That’s why Lehel, now an American, doesn’t take the freedom to buy precious metals for granted.
“The ability to purchase investment-grade metals is amazing,” he says, “and people [in America] don’t do it.”
(Not yet, at least.)
During the tail-end of Romania’s hyperinflation, Lehel’s family began scooping up all the gold and silver jewelry they could with the money they got from selling their homestead. He recalled when his mother purchased a 4 gram, 18 karat gold necklace for a whopping 2 million Romanian lei (at 6 million lei per ounce). A decade prior, for perspective, that necklace might’ve cost 1,000 lei, or less. In doing so, they were able to amass a small fortune and have enough to leave Romania for greener pastures.
In the beginning of hyperinflation, however, nobody really cared about precious metals: “Gold or silver could have been a good currency if people had any,” said Lehel. “But even if they did, people would have wanted to barter their alcohol first, or their coffee, or their produce first. They would sell anything before they would sell their gold.”
Gresham’s Law states that people will always use the least valuable currency first. It’s why ramen noodles are the most popular currency in prison. Prisoners trade with ramen and hoard the most valuable assets (stamps, prepaid Visas, and prepaid smartphones… AKA, prison gold).
The paradox of precious metals during a period of hyperinflation is that, while the price is going up compared to fiat, the price could actually go down compared to what people need.
Though this may not become as big a problem in the U.S., it was a massive problem in Romania. If somebody was selling or trading gold, the buyer knew they were desperate… so they would take advantage of their desperation and squeeze them dry.
Again, perhaps not a perfect analogy of what could happen here in the U.S. But worthy of a chew.
Lehel’s biggest takeaways:
→ Hyperinflation stops when people stop caring about the fiat currency and the government issues a new currency. (Or people adopt a new system that makes the old one obsolete.)
→ It would be wise to prepare while you still can. Focus on things that will become important after the shift. And invest your money long-term in things that will maintain their value.
Although gold is no cure-all…
It is, indeed, one of the best ways to preserve your wealth for the long haul.
Fortunately, our friends at Hard Assets Alliance have everything you need to buy, sell, and take delivery on your preferred metals.
(Full disclosure: As ownership partners of HAA, we may also benefit.)
If you haven’t yet…
Managing editor, Laissez Faire Today