Gold is Good as an Inflation Hedge, but Better as a Crisis Hedge
Gold is known as an inflation hedge, but its role as a crisis hedge is even more important.
Gold is anti-fragile, to use the term coined by risk analyst and bestselling author Nassim Taleb. When currencies collapse and economies falter, Gold can ensure your survival, financially and literally.
Below are 3 examples of crises during which you would have been fortunate to own Gold, as follows:
1: An Economic Crisis
During the Great Depression, 37% of all non-farm workers were unemployed and many families were financially destitute. Investments and economic growth were at abysmal levels: from Y’s 1929 to 1933, the Dow Jones fell by 90% and the US GDP dropped 30%.
Up until Y 1934, the US was on a Gold standard, which allowed citizens to redeem paper dollars for gold. There are many indications that Americans flock to gold when economic problems begin to emerge.
After the initial crash of Y 1929, redemption’s of paper for Gold skyrocketed. Withdrawals were so large throughout Y’s 1929–1930 that interest rates had to be raised to halt the outflows.
Just like Indians today, Americans understood that Gold was superior to paper (fiat) currency. As Gold is money, it is payment in and of itself. Paper currency is simply a promise to pay.
Withdrawals eventually became so overwhelming that on 5 April 1933, President Franklin D. Roosevelt signed Executive Order 6102, which prohibited private ownership of Gold. The following year, as part of the Gold Reserve Act, the government changed the Gold price from $20.67 to 35oz
Another indicator of the move into Gold was the performance of the largest Gold mining company at the time, Homestake Mining. While the Dow Jones fell 90%, Homestake was up 474% between Y’s 1929 and 1933.
From increasing redemption’s to investing in Gold companies, the actions of Americans show that even in a deflationary collapse, Gold is the “Go-to” asset.
2: A Currency Crisis
During Weimar Germany’s episode of hyperinflation, inflation peaked at 200,000,000,000% (that is 200-B %) in 1923. Prices 2X’d every 15 hours. Millions of hard-working, thrifty Germans found that their life’s savings would not buy a cup of coffee.
My family was from Germany and I recall as a boy them saying that it once took a “wheel barrel” full of Marks to buy a loaf of bread.
While the German Mark was being inflated out of existence, the price of Gold increased exponentially. In January 1919, one ounce of Gold sold for 170 Marks; by November 1923, it cost 87-T Marks.
As in many currency crises throughout history, those who held a portion of their savings in Gold escaped total wipe-out.
But Gold doesn’t need a full-blown currency crisis to perform well.
In the 2 weeks in Y 2016 following Britain’s Brexit vote, Gold priced in Sterling rose 24%. The same happened in Russia in late Y 2014 when Gold priced in rubles rose 79% in only months.
3: A Banking Crisis
Bank holidays are directly punishing depositors and savers, as the citizens on the island of Cyprus discovered 1st hand.
Needing a cash injection to stay afloat, Cypriot banks raided customer accounts in early Y 2013, taking 6.75% of deposits in accounts under EUR 100,000 and 40% in accounts over EUR 100,000.
This happened overnight, and without warning.
By the time depositors pulled their money out of the banks, it was too late.
Source: Central Bank of Cyprus
Cypriots with savings outside of the banking system, such as in Gold escaped intact. During the debacle, Gold priced in EUR’s rose by around 50 Euros.
Gold has proved a useful asset to own during banking crises throughout history. Not only is it useful when banks move to take your savings, Gold also profits from the uncertainty that arises from such events.
The Big Q: Having looked at the precious Yellow metal’s performance during different crises, what lessons can we learn?
The Big A: Gold is crisis insurance
Whether there is hyperinflation or a banking collapse, Gold has historically been the asset to own in times of turmoil. Given its intrinsic value and safe-haven status, there is no doubt that Gold will remain a wealth preservation tool during financial crises.
The reaction of the Indian people to a potential Gold ban is the latest reminder of why owning Gold is important.
Crises do not come along often, but when they do, it is better to be safe than sorry. – Paul Ebeling
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