Dumb question about hyperinflation ... or maybe not

We buy gold today at $1141.00 for one AGE, plus dealer markup and shipping.

If, (may it not be so), but if we experience a Weimar or Polish type of hyperinflation around 2015, and it is in the thousands of percents, where does gold stop?

Is it realistic to think that if a dollar is inflated a thousand times or more, that an ounce of gold will do the same thing?

I don't mean to sound stupid (though, maybe I do) ... but, what will the value of gold do when the dollar is hyperinflated? There's gotta be a limit, right?

Not asking for predictions of inflation ... just what would happen IF we get massive h-inflation.

Thanks.

 

Log in or Sign up to hide this ad.

In any hyperinflation scenario you would not want to sell much of anything, that is the time to buy, if you could find anybody to sell. After all, why sell your goods today when tommorow you could get ten times as much? There would be probably more trading than using cash, since cash would be losing value by the minute.

 

I wonder if the dollar does experience hyperflation that it take $1,000 to buy what $1 will now if that would actually equate gold to being worth $1,100,000/oz or if gold would be worth less or more then that.

I understand the basis of hyperinflation but not the result, especially in the fact that the dollar is the world standard currency.

 

I believe a correlation exists between military strength and currency strength. If we dismantle our military while debasing our currency, that might be problematic. Otherwise, I don't see hyperinflation being an issue in the near term. In fact, deflation is a much more realistic/worrisome possibility than hyperinflation (imho).

...but to answer your question, gold would be (as it always has been) a leading indictor of inflation.

 

Deflation is the least of my worries. The government recently dumped billions of dollars into the economy. Inflation occurs when you have too much money and not enough product. While everyone is in a crunch right now, if the government doesn't stop dumping money in at the magnitude it is now without taking it out, we are going to experience inflation within the next few years. Not necessarily hyperinflation, but inflation in general.

 

It seems to me that demand is the only thing that would truely raise the price of gold. The purchasing power of the dollar may fall, but an ounce of gold would still buy you the same amount of consumer goods. I guess a better indication of inflation is its strength versus other currencies such as the Euro, and prices in general in the grocery store.

 

Gold prices will mirror inflation. But hyperinflation is a low probability bet.

 

You may want to bump it up a bit higher on the list. When an economy gets deep into debt, and the debt cannot be serviced, the normal outcome is large scale default which results in deflation as in the 1930s. Everyone assumes that this won't happen here, but it's a bad assumption. Look at Iceland. Stocks are down. Property values are down. Wages are down. Pensions have been cut. The currency is down. It's a classic deflationary crash. Nobody is walking around with wheelbarrows of money. There is no money. The future might include inflation OR deflation. You have to be prepared for both.

 

Well said! :thumb:

What are your thoughts on the FASB (aka "the Stanford Village Idiots") and their ill-conceived, ill-timed Mark-to-Market rule of 2007? ...and why did it take so long to switch to the more sensible Mark-to-Cash Flow rule?

 

Unfortunately, I think that if there is an extreme in either direction, inflation or deflation, there will be larger, more immediate problems than the value of gold.

It's debatable whether reported inflation rates accurately reflect reality, but that's quite another topic...

 

I don't have the answer. I'm not so sure mark-to-market was ill-conceived. What was ill-conceived was the purchase of non-liquid assets by the financial institutions in the first place. They wanted to play "masters of the universe" and got burned while running their gambling casinos. I don't blame the rule for imprudent actions. I don't think it caused the problem. It only revealed it.

Mark-to-cashflow leaves the door open to major abuse, and it probably is being abused. I suspect there are many assets on the books carried at full value that will never be liquidated for the stated value. Being current on payments is no guarantee that an asset is not significantly impaired.

 

I would hardly consider AAA rated securities issued by a GSE an "imprudent investment". It was the deterioration of the foundation (compromised lending standards) on which these assets were based that led to the collapse. We had the Foxes (Dodd, Shumer, and Frank) watching the Hen House!

At least Mark-to-Cash Flow permits the securities to trade like bonds until the market stabilizes...that seems more accurate than to assign them no value at all...(imho). I still think this whole mess hasn't been adequately dealt with...it's all being swept under the carpet.

 

Is it safe to say that whether we have inflation or deflation, that holding gold/silver is a good safe bet no matter the outcome?

There's all talks about the price of gold in the near future from $3K to $5K to even $10K an ounce. No one really knows of course, but for those that study the PM market and are up on our monetary policy could probably make a pretty close guestimate.

I'm also glad someone created this thread as I'd like to add one more thing to it. They talk about how PM's have a 10-15 year bull cycle.

So if gold/silver's cycle began around 2000, then doesn't that mean that at 2010 we are just about there? What happens in 2015? Surely the USD's value will be even more debased. So does one unload their PM's?

Are we not talking about a natural bull cycle anymore because our monetary policy wipes that out and puts us in a different course? Like in a different timeline?

 

True, true...but I really like stocks in this accomodative environment, also. I jumped back in with both feet in March 2009 (the same day they recinded the Mark-to-Market rule) and the market has been very kind! :eating:

 

Wow! Early 2009 was a great time to invest! I am pretty upset that I didn't drop a load of cash on Ford stocks. Oh well...that's hindsight though.....

 

These are all fascinating replies, and I fully appreciate the way a forum conversation goes, meandering and changing, etc.

However, nobody has attempted to answer my simple original question.

Please don't say "h-inflation is a bad bet," and various other opinions, even though they might be completely true and prophetic.

The original question posed, reworded to be perfectly clear, is this:

First, assume Hyperinflation DOES happen. Then, does gold increase in value in the same proportion to dollars? If one dollar reaches 100 times its current "value," will an ounce of gold then be worth 100 times its current $1132/ounce? Historically, what has happened to Gold when h-inflation happened?

 

There are two (2) components to monetary inflation; supply and velocity. Most folks focus on supply because velocity has been (in our lifetimes, anyway) fairly stable. The Mark-to-Market rule combined with other factors to create the "perfect storm" that brought monetary velocity to a screeching halt in 2008.

The Administration is doing everything in their power to get things moving again and avoid a deflationary spiral. All in all I think they're doing a pretty good job. There are many mechanism to gently withdraw liquidity from the markets when the time is right. Inflation is a concern, but hyper-inflation? ...not so much (imho).

 

Excellent thread, btw. I really like Cloud's take on these matters...he's really sharp! "I only disagree to learn."

I believe I attempted an answer to your question in Post #4 with...

...meaning, "Yes, gold should increase proportionally with inflation." If an Oz of gold buys a nice snowblower today, you should expect it will buy a nice snowblower 10 years from now...regardless of inflation (everything else being equal).

Again...(imho).

 

Thanks for the 411. I completely forgot about velocity. That's important. You're right most people do focus on supply, I try to avoid watching amatuer youtube videos of "buy PM's" vlogs because I'm not sure many of them really understand what they are talking about. Now that you brought up velocity, I don't recall many of them even mentioning about it.

I'll have to look into Mark-to-Market rule because that's a new one for me...

 

I answered your question very directly. Gold prices will mirror inflation. In other words, gold will increase in price roughly in proportion [maybe a bit more] to the decline in the dollar. But your use of the word "value" is wrong.