Why Invest in Gold During Inflation?

buying gold

Inflation is a silent killer. As John Maynard Keynes’ famous quote about Lenin goes:

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

That statement is as true today as it was 100 years ago. But just as true is that people want to protect themselves against inflation.

The inflation of the past few years has hit many American households hard. Rising prices have caused difficult financial decisions to be made, with salaries not keeping pace with inflation and debt levels rising to record levels.

Many people question how they can protect themselves against inflation, with many turning to old standbys like gold. But if you’re new to precious metals, the question you may ask yourself is why you should buy gold during inflation?

What Is Inflation

First let’s define what inflation is and what it isn’t. Inflation is an increase in the money supply, the effect of which, all other things being equal, is an increase in prices.

Over time the effect of inflation has come to be conflated with inflation itself, such that measures of the general price level such as the Consumer Price Index (CPI) have become synonymous with inflation today.

What this redefinition of inflation does is obfuscate and obscure the actual origins of inflation so that it makes it even more difficult to diagnose its occurrence. If Lenin’s famous comment on inflation pointed out how difficult inflation was to diagnose before CPI and similar measures existed, imagine how much more difficult it is for most people to recognize today.

When the Federal Reserve increased the size of its balance sheet beginning in 2020 and the money supply began to rise, many knowledgeable economists began to sound the alarm about inflation. Yet because the Fed relied on CPI and other price level measures to demonstrate inflation, it ended up behind the curve as price levels rose.

Defining inflation as a rise in prices allows monetary authorities to deflect blame away from their own monetary policies when prices rise. If food prices rise they can blame it on bad harvests. If energy prices rise they can blame it on decreased oil production or refining capacity. And when housing prices increase they can blame it on increased demand.

In all of these cases, they can just ignore the underlying reason that all of these prices are rising at the same time, however, which is most often the result of the increase in the money supply that has been created by the central bank.

How Does Inflation Impact You?

Now that we’ve defined inflation, let’s talk about how inflation impacts your life, in ways both seen and unseen.

1. Rising Prices

The first and foremost way that inflation impacts you is through rising prices. These prices aren’t always going to rise at the same rate in all sectors of the economy, however, so you may see prices for food rise higher than others at one point, while housing prices rise higher at another point.

Once these prices rise, they rarely ever decrease again. That’s because once the money supply increases it almost never decreases. And so as the money supply is slowly and steadily increasing, prices throughout the economy slowly rise over time.

2. Changing Behavior

The second way that inflation impacts you is through changes in your behavior. Inflation expectations can be just as important as inflation in this regard.

For years, the official inflation rate in the US was around 2% or so. Expectations for inflation among consumers therefore remained low. Everyone knew that prices would rise over the long term, but in the short term the increases weren’t noticeable.

Post-2020, however, the money supply and inflation rates began to rise significantly. All of a sudden, prices at the grocery store began to rise, sometimes every few weeks.

Many people were jarred by that, and began to stock up on non-perishables before prices went up again. And this type of behavior occurred throughout the economy, as consumers stepped up consumption in advance of inflation.

This is the type of change in behavior that inflation can bring about, as consumers change their consumption patterns in response to inflation. Normally you only hear stories about periods of hyperinflation, when people rush to buy goods as soon as they’re paid, before they’re money becomes worthless.

But we had a little taste of that ourselves here in the US, as inflation rates shocked people’s expectations and began to change longstanding consumption patterns. And as inflation has yet to fully return to pre-2020 levels, inflation expectations remain elevated.

3. Reduced Purchasing Power and Lower Standard of Living

Because prices of goods and services rise with inflation, the purchasing power of people’s money decreases. Each dollar no longer goes as far as it used to, and so households are able to buy less and less with their money.

As the effects of inflation accumulate over time, this reduction in purchasing power gradually leads to a lower standard of living. This doesn’t become apparent year to year, but over the course of time it becomes obvious to keen observers.

You probably see a lot of this in the media today, with millennials and Gen Zers bemoaning the high cost of housing. Rent prices have far outpaced salary growth, and a growing percentage of people’s income is going towards housing costs.

Indeed, if you look at the cost of houses today, houses that 40 years ago might have cost 3-5 times an average salary are now going for 10 times average salary or higher, even after adjusting for inflation. Many households today require two parents to work full time just to afford the same standard of living that 40 years ago one working parent could have provided.

Education is another area where costs have increased far higher than both income and inflation, with increasing pressure to go to college and now to graduate school. Students come out of university with six figures of debt and no clear plan of how to pay it off, unlike their parents, who often were able to support themselves through college with part-time work.

These effects of inflation don’t happen overnight, but they do occur, and when they do, they impact society in far-reaching ways.

4. Time Effects of Inflation

An oft overlooked impact of inflation is the fact that not everyone is impacted by inflation at the same time. When new money is created, those who get use of the new money, banks, financial institutions, the government, government contractors, etc., are able to use that money before prices rise.

There are therefore three groups of people when it comes to inflation’s effects:

  1. those who get use of the new money first before prices increase;
  2. those who get use of the new money as prices are increasing; and
  3. those who get use of the new money after prices have increased.

Obviously that first group benefits from inflation, and even might encourage inflation. The second group may be ambivalent, although it probably recognizes the rising prices and doesn’t like them. And the third group is hit hard.

That third group includes those on Social Security or fixed incomes, as well as those no longer receiving regular salaries. They have to bear the brunt of inflation first, then they get their inflation adjustments or COLA increases.

Combating Inflation

The easiest way to combat inflation is to keep it from happening. But that of course requires the central bank to refrain from excessive money creation, which isn’t easy for central banks to do.

When you have a hammer, you treat everything like a nail. And the hammer that central banks wield is money creation, their primary tool to engage in monetary policy through open market operations, large scale asset purchases, etc.

Central banks, as much as they like to think of themselves as independent, are ultimately at the mercy of governments for their continued existence. Their monetary policies always support government aims such as full employment, moderate interest rates, and relatively stable price levels.

Their bias will always be to allow at least a tiny bit of inflation, which benefits governments that can then repay their debts in devalued currency. But that inflation at the same time devalues the assets of savers and investors, requiring them to take steps to proactively protect themselves against inflation.

Protecting Yourself Against Inflation

Protecting yourself against inflation means ensuring that your assets aren’t losing value to inflation each year, or that at the very least you’re minimizing your losses to inflation. Cash holdings, for instance, will almost always lose value to inflation, and so many people choose to minimize their cash holdings.

But what about stocks, bonds, mutual funds, index funds, exchange-traded funds, and other common financial investments?

These assets fluctuate in value, and they can go up or down depending on the movements of markets. In good years when they make gains, they can outpace the rate of inflation. But there are times when those assets don’t always perform well, or when they lose money, and then they really perform poorly against inflation.

Americans have had the luxury of not really having to worry about high inflation in recent decades. Not since the 1970s and early 1980s have we had the threat of high inflation and even stagflation. So thinking about protecting yourself against inflation may require an adjustment of mindset.

Traditionally, protecting against inflation meant holding assets that could hold their value against inflation, like gold and silver. And once again today, more and more Americans are starting to buy gold and silver to help safeguard their savings against inflation.

Gold vs. Inflation: A History

Once upon a time the US dollar was defined as a specific weight of gold. That hasn’t been the case for over 50 years, since which time gold has been able to freely fluctuate in value.

But the gold price often rises in value in an inverse relationship to the value of the dollar. The weaker the dollar gets, the higher the dollar gold price may rise.

Since 1971, the US dollar has lost 87% of its purchasing power, while the value of gold has increased over 5,000%. That’s a pretty consistent loss of purchasing power for the dollar, and a pretty significant rise in value for gold.

Once President Nixon closed the gold window in 1971, and the gold price was able to move freely on international gold markets, the gold price averaged annualized gains of over 30% per year over the course of the 1970s. That decade was characterized by high inflation and stagnant economic growth, two threats that are rearing their heads once again.

Gold and Your Savings

With the US economy seemingly growing ever closer to recession, more and more Americans are getting nervous about the safety of their savings and investments. High inflation, bank failures, and a slowing economy are starting to change people’s behavior.

More people are looking to safeguard what they have ahead of any potential recession, and many of them are doing that by buying gold.

Whether it’s by buying gold with a gold IRA or making a direct cash purchase of gold to store at home, there are numerous options available to you to buy gold. If you’ve never bought gold before, you may be nervous about the process, and that’s understandable.

At Goldco, we’ve helped thousands of people through the gold buying process. Whether through a gold IRA or through a direct purchase of gold, we take time to ensure that our customers are happy with their purchases and with the process of buying gold.

With over $2 billion in precious metals placements and over 5,000 5-star reviews, Goldco works hard to ensure that our customers receive quality gold and silver products and exemplary customer service. If you’re thinking about buying gold or silver to protect your assets against inflation, call us today to learn why so many people choose to do business with Goldco.


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