Why do gold and silver protect against inflation?

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Gold and silver are one of the simplest investments, Austrian economist Carl Menger points out in his book origins of money. “precious metals have had an impeccable 5000 years of stability, development, innovation and use as a medium of exchange between people”. Precious metals have lasted as a medium exchange for most of the existence of human society. Numerous records account that precious metals have been in use since the time of Ancient Egypt when nuggets of gold were used in trade.

Gold and silver can be bought in many different forms such as coins, rounds, bars, jewelry, artistic poured metals, collector coins, and much more. It’s important to note gold and silver also come in different purities. Most people are familiar with 10k gold, 14k gold, and 18k gold. all of these have different amounts of base metals to add strength/durability. When talking about Investment grade metals you’re usually looking at 0.999% purity or higher with some other options out there being around 0.80-0.98.5% purity.

The proper name for Investment-grade gold and silver is bullion which is 0.999%+ pure. Investment-grade metals can usually be purchased as coins, rounds, and bars. In Canada, precious metal bullion that is 0.999+ in purity is Tax-free from HST/GST.


The History

As stated earlier gold has been a way for humans to barter for over 5000 years. In more modern history gold has been used to back up currencies like the US dollar to gold (the gold standard) till 1971. Another example is the British pound sterling which was backed by sterling silver (silver with a 0.985% purity). Even to this day, multiple central banks around the world continue to buy gold which they store in their vaults as protection against inflation and economic crises.

You maybe be thinking at this point “This is some great information but why should I own gold”. since the creation of the Federal reserve in 1913 the US dollar has lost 98% of its purchasing power. Central banks accomplish this by inflating (increasing) the currency supply. Inflation is the reason why back in the day when things would cost 0.01$ in say 1912 are now 1$+ in 2020. The federal reserve is not the only central bank to do this, Central bank policy globally including Canada is to inflate the currency supply by 2-3% a year.

Inflation the Silent Killer

When you compare this to saving accounts which usually pay around 1%(or under) per year. Inflation makes it so individuals who do not invest and achieve a rate of return above 3-4% and instead only use a savings account are becoming poorer. Most people will live their lives without even knowing they are becoming poorer year over year.

After 10 years you might think you’re richer but the amount in your bank account can now purchase 10-20% less. (as a thought exercise say you make 10$ a week and you only eat 1 egg a day. eggs usually cost you 3.50$/Per Dozen but because of inflation egg prices have gone up to 5$/Per Dozen. you now can purchase 15% less each week). The other issue with this is inflation increases prices without creating any meaningful economic growth making it difficult for wages to keep up with inflation.

Why you might of not heard of gold till now

Retail Banks and financial planners usually do not offer physical gold or silver as an option. As employees/businesses, they have an incentive to steer you in other directions. The typical response you’ll hear from banks is that gold and silver are terrible investments. Banks will do everything in their power to talk you out of purchasing precious metals for yourself. This is because banks can make more money when you invest in their mutual funds/other products where they can continually charge you fees instead of selling you a gold or silver coin.

Gold and silver bullion are some of the best defenses against inflation. During the year 2000 gold was around 200-250$ US/per ounce. Fast forward 20 years it peaked around 2000$ US. Precious metals (Gold more so) has outperformed the S&P 500/most mainstream investments since the year 2000 without any signs of slowing down due to the global deficit spending due to Covid 19.

If you had 200$ in the year 2000 would you of rather put that 200$ in a savings account or purchased an ounce of gold? say instead you chose to purchase the gold you would have averaged a 40-50% return per year compared to a savings account of 1% or less a year.


The Evidence

If you are still not convinced you can pull up a 50 to 100-year chart for gold and look at some specific dates. Gold has skyrocketed since President Richard Nixon took the US Dollar off the gold standard in 1971. Gold and silver have gone up drastically from the quantitative easing done to combat the financial crises of 2008. Hyperinflation in foreign countries such as Venezuela, Weimar Germany, Zimbabwe, Israel, and Hungary are some foreign examples to name a few as well as the many other financial crises within North America during the 20-21th century.

Gold and silver are safe-haven investments for wealth preservation during times of economic crisis. Precious metals are not different from any other investment, you should buy low and sell high. When investing one should always do their research before investing and this is no exception. This short essay covers some of the basics of precious metals but should not be used as your only source or reason for purchasing precious metals for your portfolio. (This information is not meant to be used as investment advice just a starting place for your own research to begin)


Published by East Liberty Coins and Gems

East Liberty Coins & Gems. We are an online Precious Metal & Gem Dealer. We carry Bullion, Numismatics coins, Ancient coins, and Precious gems (Emeralds, Rubies, and Sapphires/Coming in 2022). All orders ship from Halifax NovaScotia, Canada.

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