Inflation, hyperinflation, and stagflation are terms commonly used in the world of economics. Inflation refers to the general increase in prices. It is the rate at which the price of services and goods in an economy increases. You can also define inflation as the rate at which purchasing power reduces or declines rapidly. For example, if inflation is at 20% and you currently spend $200 per week on food, you would need $220 for the same amount of products the following year.
On the other, hyperinflation refers to excessive, rapid, and out-of-control general price increase in an economy. Hyperinflation is different from inflation because it is rapidly rising inflation. With hyperinflation, prices of goods and services could go up by over 50% in a month.
Stagflation is a term used to describe an economy with a stagnant or slow economic growth rate, inflation, and high unemployment rates. Governments and economic policymakers try to avoid cases of stagflation at all costs. When an economy undergoes stagflation, citizens will struggle with high rates of unemployment and inflation. With high cases of unemployment, the economy slows down, affecting the overall economic growth rate. This makes stagflation very dangerous to any economy.
While inflation, hyperinflation, and stagflation have devastating impacts on the economy, we want to look at how these factors relate to precious metals. If you plan to buy gold or any other precious metal, read on to find out the relationship between inflation and these metals.
Relationship Between Inflation and Precious Metals
Inflation, stagflation, and other market conditions influence the values of various commodities and services. However, inflation affects precious metals differently. As much as precious metals like gold, palladium, silver, and platinum have dollar-dominated open market valuations, their asking price can change at any moment due to inflation.
There could also be changes to their interest rates due to these market conditions. However, unlike other commodities that can be manufactured or grown, precious metals have a finite supply level. This means production outputs cannot be increased when the demand is high.
The influence of market conditions triggered economists to observe the specific ways the precious metals market reacts to various market conditions. The insight is meant to give investors a clear and comprehensive understanding of what to expect under specific circumstances. Understanding the relationship between these factors is essential for any investor looking to buy silver and other precious metals.
Inflation and Precious Metals Prices
When goods and services increase in price, the currency tends to lose its buying power. Inflation generally weakens money value, leading to a sharp increase in prices. It is important to note that inflation occurs naturally in an open market. It affects the ability of a dollar you earn today to buy the expected amount of goods or services tomorrow. Theoretically, when prices increase, employees demand higher wages to keep the cost of living in balance. In most cases, wages aren’t increased during inflation, and people end up suffering tough economic times.
Gold, silver, and other precious metals are affected by inflation differently compared to goods and services. This is because precious metals have both industrial and symbolic value. You cannot print precious metals at will like money and paper. Gold is the most precious metal because it is seen as a sign of wealth.
Apart from their high value, precious metals are used by the manufacturing industry as conductors — precious metals are the best conductors in the world. While inflation can affect other commodities, precious metals are not affected. This is because they have limited supply and will always retain their value as any other scarce commodity. This remains constant even when the manufacturing industry is struggling.
When the rate of inflation increases, the value of printed currency drops. This can lead to slow retail sales and an overall drop in the stock market. While stocks take the hit, people turn to precious metals as low-risk investment options. This is because they have limited supply and tend to retain their value even when the manufacturing industry plumps. The more people opt for precious metals, the scarce they become due to limited supply.
This results in higher trading prices for all precious metals. Therefore, deciding to buy gold is beneficial because you will own a commodity that increases in value even when other stocks are declining. This goes a long way in securing your finances and preventing losses.
Interest Rates and the Precious Metals Market
Some governments try to control the rate of inflation by increasing interest rates at central banks. This is meant to limit currency circulation. In most cases, this method works in the short term because it significantly increases bond yields. It also encourages people to save money, reducing currency circulation.
While this may help control inflation rates, your currency still won’t have the buying power it once had. In the US, an increase in interest rates puts pressure on precious metals. As a result, it limits those who want low-risk investments to short-term gains mostly found in bonds. It is important to note that long-term gains don’t increase, explaining why those interested in long-term holdings often diversify it with gold and other precious metals.
This is beneficial in several ways. For instance, precious metals have stored wealth for many years, making them a reliable option. In fact, precious metals have a long history of appeal than any central bank in operation today. This makes them more valuable than any traditional currency. With them, you have a safer and more reliable financial market.
Why Consider Investing in Precious Metals in Inflationary Times?
Inflation has a significant impact on the price of goods and services in an economy. This means that if you have monetary value, you are likely to experience losses. Therefore, you should consider investing in precious metals during inflationary times. This is because precious metals like gold and silver offer unique inflationary protection. There are several reasons why this is the case.
First, they have intrinsic value. Intrinsic value refers to the measure of what an asset is worth. This value is arrived at through a complex financial model rather than the current trading market price. Therefore, precious metals give you value that won’t be influenced by what is happening on the market — inflation and other market conditions won’t affect the value of precious metals.
Another reason you should buy gold is that it has no credit risk. Credit risk is a case that arises when a borrower defaults on payments. When a borrower fails to repay their loan or meet their financial obligations, you could experience significant losses. However, investing in precious metals prevents such cases because it has no credit risk. It would help if you also buy silver and other precious metals because it cannot be inflated. This means you can’t print more of them at will like you would print traditional currency.
Furthermore, precious metals offer genuine and comprehensive upheaval insurance against military/political or financial upheavals. This means they won’t lose value in case of political or financial instabilities. From an investment theory point of view, these metals also provide a negative or low correlation to other asset classes like bonds and stocks.
This means that even the smallest percentage of precious metals in stock will reduce both risk and volatility. Thanks to their high value, precious metals can positively influence the course of a market. The risk of losses is significantly low with precious metals. Therefore, investing in precious metals, especially during inflationary times, comes with several advantages. Buy gold today to secure your finances!
The Bottom Line
Precious metals provide an effective and useful means of diversifying a portfolio. The fact that inflation and other market conditions cannot influence their value makes them even more valuable. You can harness the volatility of precious metals to accumulate wealth. By doing so, you prevent the risk of inflation and its effects on your finances.
