Will Gold Really Protect against Hyperinflation?

Incessant ads on radio and television tell us a "monetary crisis impends" and that "NOW is the time to buy gold!"

I don't purport to be an expert on gold. But even if a monetary crisis impends, is buying gold really the solution? I am enough of a skeptic to wonder if we're being flimflammed.

The rationale for buying gold is that U.S. government spending has caused our deficit to "balloon to $19.9 trillion with no end in sight," and while today's U.S. inflation rate is manageable, tomorrow the nation could slip into "unmanageable hyperinflation."



The "goldbugs" tell us that the line between manageable and unmanageable hyperinflation is "confidence." The people of the U.S., since the Great Depression, have accepted paper money, confident that the government will maintain the stability of the purchasing power of the dollar over the long haul, or at least, for the foreseeable future. Once that confidence is lost, the goldbugs argue, the people will act to rid themselves of that paper (currency), and acquire tangible items, instead (such as land, gold, etc.).

Gold promoters cite the example of the German Weimer Republic during the 1920s (in the aftermath of World War I). During that period, according to gold advocates Mikhan and Clark, German inflation morphed into ruinous hyperinflation:

"In January 1919, one ounce of gold traded for 170 marks; by November 1923, that same ounce was worth 87 trillion marks.

"Over this five-year period, the gold price increased 1.8 times more than the inflation rate."

Based on that data, the authors argue, "Hyperinflation wiped out most people's savings, turning wealthy citizens into poor ones literally overnight. Those who had ... gold experienced no loss in purchasing power."

But is it really that simple?

Let's assume Weimer Republic-like hyperinflation hits the U.S. a year from now, and that you had providentially bought 100 American Gold Eagles on March 1 from GovMint.com at $1,295 each (total cost, $129,500).

In June 1922, 320 German marks were equal in value to one U.S. dollar. The price of gold in June 1922 was about $20.67 (U.S. dollars) per ounce. An ounce of gold that June would have cost roughly 6,600 marks. Then hyperinflation set in. By December 1922, it took 7,400 marks to buy one U.S. dollar.

By November 1923, it took 4,210,500,000,000 marks to buy that one U.S. dollar. Therefore, by Nov. 1923, an ounce of gold was worth 87 trillion marks. Of course, no one would take marks by that time. By that time the savings of the middle class had been wiped out, and Germany had sunk into a barter economy.


As hyperinflation had set in, Germans began dumping their marks and buying anything from food to sweaters to shoes. You could eat food. You could keep warm in a sweater. You could trade extra sweaters for food or socks.

But what could you do with gold? You could sell the gold you bought for 6,600 marks in June 1922 for 87 trillion marks. But what good were 87 trillion marks? Were they suitable for toilet paper? You could sell them for one U.S. dollar -- if you could find someone stupid enough to trade dollars for "toilet paper." But if you were in Germany, what would you do with that U.S. dollar?

Of course, you might trade your gold or U.S. dollars for a 50-pound sack of potatoes on the black market. But if I have potatoes, while people are starving around me, do I trade for gold? Dollars?

In truth, I have no idea whether gold is a good investment as a guard against hyperinflation. I'd love to hear from a couple of experts with differing views.

By the way, the IRS says gold is "a capital asset" and any gain from the sale or exchange of such an asset generally is a capital gain. Gold is taxed as a "collectable" at a maximum 28 percent rate. (Exception: dealer "gain" is ordinary income).


Posted: QCOline.com April 4, 2017
Copyright 2017, John Donald O'Shea