Gold and Inflation: Lessons From History

While prices throughout the economy have risen significantly over the past few months, they’re not the only thing growing. Fears of inflation have been rising too, as more and more households are seeing the pinch of higher prices. From housing to gas to food, prices have gone up and up while incomes haven’t.

Even the massive amounts of fiscal stimulus being paid out haven’t helped anything. In fact, that money created out of thin air is what’s responsible for the price increases we’ve seen so far. And as the purchasing power of each dollar continues to decrease, those households receiving stimulus payments are seeing the stimulus money buy less and less each time.

Many investors are wondering whether the savings they have worked decades to build up will last them through retirement. With the Federal Reserve intent not just on boosting inflation, but also waiting possibly for many months to see just what effect higher inflation will have on the economy, you may find yourself one of the Fed’s guinea pigs, watching in horror as inflation erodes the purchasing power of your assets. By the time the Fed steps in to stop it, it may be too late to undo the damage.

This isn’t the first time we have dealt with inflation in this country, and it won’t be the last. Persistent inflation over time has been a problem for more than a century, and periodically the rate of inflation’s rise increases. Looking back to history, what lessons can you as an investor learn from inflationary crises to defend yourself against coming inflation?

Why Does the Fed Want Inflation?

The first thing you need to understand is why the Fed wants inflation in the first place. For years it has focused on a roughly 2% annual rate of inflation. It considers that to be a moderate level of inflation, never mind that it means that prices nearly quintuple over the course of the average American’s lifespan.

But Fed policymakers also stick to their old beliefs in the Phillips curve. The Phillips curve is an economic theory that posits that there is a relationship between inflation and employment. According to the model, higher inflation boosts economic growth, resulting in more job creation. If the economy overheats, inflation needs to be reduced, resulting in job losses and higher unemployment.

It’s a simplistic hypothesis and one that was disproven after the stagflation of the 1970s, when both inflation and unemployment rose. Yet it remains the model that underpins much of the thinking of central bankers today. And because the Fed has a dual mandate to ensure full employment and stable prices, the Fed operates as though the Phillips curve is still relevant.

Listen to any of the Fed’s policymakers speak today, especially the doves, and you’ll hear them talk about the need to boost inflation in order to ensure that the labor market recovers. The Fed announced last August that it is prepared to allow inflation to shoot above 2% for a long period of time in order to achieve a long-term 2% average. And Fed policymakers continually talk about letting inflation run hot as long as the labor market sees job gains. The Phillips curve may have been shown to be useless during the 1970s stagflation, yet the Fed continues to use it as its guide.

What Happened During the 1970s?

The stagflation of the 1970s shocked the country, and it really shook up the economics profession. Keynesian economists were floored by the fact that both inflation and unemployment were rising, something that the Phillips curve posited wasn’t possible. But other economists such as Milton Friedman predicted the stagflation, as they weren’t wedded to the Phillips curve’s oversimplification of the relationship between inflation and employment.

Friedman believe that any relationship between inflation and employment could only occur in the short run, so that while higher short-term bouts of inflation could boost employment in the near term, over the long run there would be no positive effect on employment. Today we could be seeing a return to 1970s-style stagflation, with all the dangers that brings.

The unemployment rate at the beginning of the 1970s was just under 4%. It quickly rose to 6%, peaked at 9% in 1975, and remained around 6% by the end of the decade. The rate of inflation rose too, starting the decade at just under 6%, moving to over 11% by 1974, dropping back to under 6% in 1976, and rising back to over 11% at the end of the decade. It was a riddle that befuddled government officials and policymakers.

And how did investments perform during that era? If you were invested in stock markets, your performance wasn’t that great. The S&P 500 grew from 93 points at the beginning of 1970 to just under 108 points at the end of 1979, an annualized growth rate of about 1.5%. With inflation being so high, real returns were deeply negative. Talk about losing money to inflation.

Precious metals, on the other hand, performed far better. Gold began the decade at around $35 an ounce, and ended it at $524 an ounce, an annualized growth rate of 31%. Silver’s performance was even better, rising from $1.80 an ounce to $32.20 an ounce, an annualized rate of growth of over 33%. Both of those figures were well above the rate of inflation.

Will the Past Repeat Itself?

The big question in front of us today is whether our current economic situation will mirror that of the 1970s and, if so, for how long? If you’re a believer in the cyclical nature of history, there’s every indication that we could be entering another horrible period of economic stagnation.

There were roughly 45 years between the Great Depression and the 1970s stagflation, and roughly 45 years from stagflation to today. You could argue that we’re due for a decade of high inflation and economic stagnation, one which could wipe out trillions of dollars of investor wealth.

If that ends up being the case, will the coming stagnation look like the 1970s, which saw markets finally recover in 1982 and go on to a two-decade boom, will it look like the Great Depression, from which the economy didn’t recover for nearly 25 years, or will it look like something entirely different altogether? The future of your retirement could depend on what the future holds and how you plan for it.

More and more investors today are growing nervous about stock markets, nervous about higher inflation and higher taxes in the future, and are becoming pessimistic about the direction of the economy. And that’s why more investors are turning to gold and silver to protect their assets.

These investors know that gold and silver have performed well during crises. They know that gold and silver saw phenomenal growth during the 1970s stagflation. They know that gold and silver outperformed stocks during and after the 2008 crisis. And they know that there’s a very good chance that gold and silver will continue to outperform stocks during the next crisis.

If you’ve worked hard for decades to give yourself the chance to enjoy a comfortable life in retirement, don’t let your dreams get dashed by high inflation and a weakening economy. Start taking steps to protect your hard-earned retirement savings today. Contact the experts at Goldco to learn more about how you can benefit from gold and silver.