Gold as a hedge against inflation

Globally, investing in gold is seen as protection against inflation and one of the most reliable ways to preserve wealth. The actual value of gold, expressed in terms of the quantity of goods services that can be purchased with it, has remained very stable with the purchasing power of all currencies having virtually evaporated over the past century. Investing in gold has thus proven to be a profitable and safe option.

The United States' gold standard

Expressed relative to the price of gold, the chart below shows that the value of the dollar has fallen dramatically. In 1900, the Gold Standard Act (gold standard) was introduced in the United States and the value of the dollar was equal to the value of about 1.5 grams of pure gold. This gold standard was already abolished in 1933, followed by a period with no peg between gold and the dollar. In 1944, a fixed price for gold was again set at the Bretton Woods conference. The dollar was given an exchange rate against all other currencies and was in turn exchangeable for a fixed amount of gold. However, the gold standard was permanently abandoned by Nixon in 1971, resulting in the Great Depression. The stability of the gold rate makes investing in gold a good protection against inflation.

Dollar releases gold price

Major monetary and economic turmoil followed in the period after the gold standard was loosened. The value of the dollar was no longer linked to the price of gold, allowing unsecured money to be printed (just like today). There was then no basis of confidence in the money system used. The purchasing power of $100 anno 1971 fell to less than $20 in 2006, while during the same period the amount of money printed increased dramatically.

Investing in gold to maintain purchasing power

The fact that gold did retain its purchasing power during the same period is evident from several examples where goods or services are bought and the amount of gold or silver required to buy these goods or services is considered.
If we look at investing in gold, we see the following happening. In 1971, people bought 5 loaves of bread with one gram of pure gold. 1 dollar also corresponded to about 1 gram of gold (the gold price was set by Nixon at $35 per ounce; or $1.125 per gram). Today, however, one gram of gold can buy 20 loaves of bread.

This also applies to the price of silver. The purchasing power of silver has also increased significantly over that period while the purchasing power in dollars has declined massively over the same period. Someone who had saved an old sock with 7,000 dollar notes in 1962 could only buy 1/8th of a new Mercedes Roadster with it in 2015, while someone who had bought silver with the same amount in 1962 could buy 2 new Mercedes Roadsters in 2015 and still have $1,000 left over.

Investing in gold as money supply increases

Since the start of the credit crunch in 2008, the money supply worldwide has increased enormously. Various measures are being taken by the FED and ECB (European Central Bank) to continuously pump money into the system in order to keep the economy going. In the past, such measures have resulted in inflation; the price level rises and the purchasing power of the currency falls as a result.
Since gold cannot be reprinted, investing in gold is one of the most suitable methods of protecting assets from the effects of inflation. Investing in gold historically preserves your purchasing power.
Disclaimer: The Silver Mountain does not provide investment advice and this article should not be considered as such. Past results offer no guarantees for the future.