On Gold As A Hyperinflation Put

Tyler Durden's picture

Gold has had an amazing recent run. From December 1999 to March 2012 the U.S. dollar price of gold rose more than 15.4% per annum, the U.S. Consumer Price Index increased by 2.5% per annum, while U.S. stock and bond markets registered annual gains of 1.5% and 6.4%, respectively. It is not surprising then that there is so much disagreement about gold’s future and it is this "Golden Dilemma" that a new paper by Erb and Harvey focuses on, analyzing at least six somewhat different arguments that have been advanced for owning gold:

  • gold provides an inflation hedge;
  • gold serves as a currency hedge;
  • gold is an attractive alternative to assets with low real returns;
  • gold a safe haven in times of stress;
  • gold should be held because we are returning to a de facto world gold standard;
  • and gold is “underowned”.

The debate over the prospects for gold resembles in some sense the parable of the six blind men and the elephant. Different perspectives, different models, lead to different insights. Depending upon which rationale, or combination of rationales, one embraces, gold is either very expensive or attractive.

However, one important conclusion is that their analysis shows that the price of gold is very sensitive to even a remote possibility of another Weimar Republic-like inflation episode. So while there is disagreement over gold as an inflation-hedge, it is critically a levered option on hyperinflation as even extraordinarily small probabilities of 'extreme' inflation will have a large impact on the possible future price of gold.

The Golden Dilemma

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Snakeeyes's picture

Where will the inflation come from? The Fed can't generate squat except fear. Need growth in aggregate demand to get inflation. But the banks ain't lending FOR REAL!


nope-1004's picture

On one hand he states: the U.S. Consumer Price Index increased by 2.5% per annum

Then says "gold is a good inflation hedge".

wtf?  So which is it?  CPI has been low and gold went up?  Or CPI is falsified and real inflation is much higher, and gold went up?

The reason gold has outerperformed over the last decade is precisely because we have out of control inflation and money printing, currency debauchery, and a gross misallocation of capital.

runlevel's picture

wtf ever happend to giethner? your icon reminded me i havnt heard from beavis in a while now..

MillionDollarBonus_'s picture

The sad reality is that the precious metals bubble has popped and silverbugs and goldbugs are now going to have to learn REAL investing, instead of just ‘stacking’ blocks of shiny metal. Goldbugs are now going to have to learn how to construct a mean-variance optimized equity portfolio with the little capital they still have left. If only doomer goldbugs had bought treasuries, they might have had a little more to invest.

dlmaniac's picture


It's gonna take a while for hyperinflation to strike. When Weimar happened, they did not have an asset bubble implosion preceding it. Nor did they have a global reserved currency. When they printed like crazy the result was therefore quickly felt. 

With US Dollar and this on-going debt meltdown, the case is more complex and the liquidation procedure will last a while before bankers overprint it into hyperinflation. I'd say maybe 2nd half of this decade is where HI strikes.


Skateboarder's picture

I'd love another extra five years, but the whole world is waiting for some sweet, sweet, supernatural action at the end of 2k12. Just sayin.

engineertheeconomy's picture

The economy for the wealthy is doing great and will continue to do so. The rest of us will lose just about everything we own to those select few elite bastards, except those that are heavily invested in Gold and Silver. Any person that has the opportunity but does not invest heavily in Physical Precious Metals now will be hitting themselves in the forehead with a brick in a couple of years when Gold is between five and ten thousand dollars an ounce. Any one that does not understand why that will happen, well, lets just say it's too late for you if you don't get it by now.

Oliver Jones's picture

2k12 = 2120.

If you are going to use engineering shorthand, it would help if you learned what it meant, first.

jeff montanye's picture

i'm no engineer but i don't think 2k12 is engineering shorthand.  a video game or a soviet missile maybe.

plus it isn't shorter.

Oliver Jones's picture

1k7 ohms (1,700 ohms or 1.700 ohms in European notation or 1'700 ohms in Swiss notation)
1r7 ohms (1.7 ohms or 1,7 ohms in European notation or 1.7 ohms in Swiss notation)

This definition has existed for decades - it's nothing new, and is is useful because it encodes the decimal point and magnitude in one letter (it also helps to avoid confusion between decimal and separator standards between countries.)

If you use the definition, you should understand it. Otherwise, you simply come across as a bit ignorant.

5880's picture

Weimarch wasn't the reserve currency. people had a choice

He_Who Carried The Sun's picture

"Gold has had an amazing recent run. From December 1999 to March 2012 the U.S. dollar price of gold rose more than 15.4% per annum"


Let's see by what rate/annum it comes down during the next 12 years: 5%? 10%?

As the old saying goes: What goes up, must .... ....!

TheFourthStooge-ing's picture


As the old saying goes: What goes up, must ...

...be higher than it was before.

MeelionDollerBogus's picture

Gold never went back down to 1300, not back down to 260, not back down to 35. The price of gold doesn't return to older values. It goes up then stays there forever.


Take a look: http://goldprice.org/charts/history/gold_all_data_o_b_usd.png?0.53999132...

MunX's picture

Not sure if trolling or just stupid.

akak's picture

The two are by no means mutually exclusive, and in fact are likely to be mutually reinforcing.

AlamoJack's picture

You are simply hilarious!!  Is Bevis your straight man?  Hahahaha!  Or, are you just one of the old, tired and worn out traders working for the PPT?  Telly Benny I said shalom.

MunX's picture

Your hipster iphone has some "shiny metals" in it MDB. Looks like you are a silver stacker. Welcome to the world of REAL investing.

FL_Conservative's picture

As long as money keeps being printed ad nauseum, there will be no "pop" in PM's.  Want some FACTS to back this up?  How about over 50 years of data relationship to the US money supply?  But don't let FACTS get in the way of your CONJECTURE.

Avg. Annual Price                               Avg                  Min                Max             Median

Gold                                                  $296.8             $34.6           $1,650.0          $279.8

Silver                                                   $5.6                $0.9               $35.1             $4.6

Oil (per barrel)                                    $19.8               $2.8                $91.5            $15.0

M2 (Avg Quantity)                            2,953.3             293.3             9,217.9          2,417.4


Ratios                                                  Avg                  Min                Max             Median

Gold:Silver                                          48.4                18.4                 89.6              41.2

Oil:Silver                                               3.4                  1.5                   6.8                3.2

Gold:Oil                                               14.7                 8.9                 29.4              12.4


Growth Rates:                               1960-2011          July-9-2012

Gold Price                                      4,600.9%            4,415.7%

Silver Price                                     3,759.3%            2,893.4%

Oil Price                                         2,801.3%             2,766.3%

M2                                                 3,042.8%              3,266.9%

GOSPLAN HERO's picture

King James Bible (Cambridge Ed.):

And all king Solomon's drinking vessels were of gold, and all the vessels of the house of the forest of Lebanon were of pure gold; none were of silver: it was nothing accounted of in the days of Solomon.

The gold mines of Ophir!

Perhaps this is the only historical situation were silver had little or no value.

King Solomon's gold wealth was beyond comprehension.

GOSPLAN HERO's picture

There's way too much crack in your bowl.

VegasRage's picture

The precious metals bubble has popped? ROLMAO! 



  1. Has the bond market bubble popped yet?
  2. Have the worlds governments and banks found a way to reduce all that excess stimulous from the system?
  3. Have the worlds governments and banks closed all the corruption holes to prevent paper manipulation?
  4. Have all 78 million baby boomers written the government and told them to keep their social security and medicare?
  5. Has the Euro suddenly found a solution that will save it from certain doom?
  6. Has Japan reduced it's 200% debt to GDP?
  7. Has the US gotten honest on the real numbers for the CPI, GDP, Unemployment, and long term fiscal obligations?
  8. Did we correct the massive trade imbalance between us and China?
  9. Did the people of India and China who make up half the worlds population suddenly embraced the western idea that gold and silver are no longer money over night?
  10. Did the world just sing in one voice that stimulus is the solution to all our problems?


engineertheeconomy's picture

11. Will the biggest Tsunami of Evil ever in the history of mankind suddenly stop and go backwards, leaving a smooth, calm sea?

12. Will Gravity suddenly reverse itself causing all objects and the earth itself to be catapulted into outer space?

Snidley Whipsnae's picture

If China, the Mid East, India and the remainder of SE Asia continue to maintain a floor under gold in the ~ $1,500 - 1,600 range whats to worry about?

Inflation, deflation, blah, blah, blah...

What matters is that gold is supported in it's current range and when real fear enters stage right gold will continue it's upward climb as currencies show their true colors... ie, the color of zero, which all fiats eventually end at. Printing more fiat/credit to relive a system choked with fiat/credit is not going to hurt gold in the long run. Only the most myopic would believe that gold can be permanently damaged by fiat when the paper gold/PMs game is in it's final stages. Take the long view and forget the naysayers that can't see past next week.

So let the blab continue... gold is real money and no amount of blab is going to change that fact.

cranky-old-geezer's picture



If only doomer goldbugs had bought treasuries, they might have had a little more to invest.

In the same timeframe gold has risen 500%, treasuries have risen Z-E-R-O.

And they don't pay any interest anymore, so there goes the "yield" argument.

In that same timeframe where gold has risen 500%, treasuries have LOST 70% OF THEIR VALUE from currency debasement.

500% gain or 70% loss? 

Yea, I'll take gold over treasuries ANY day.

You treasuries bugs never talk about how the dollar is losing value. 

No problem, us smart people are well aware of it, and we put our wealth where Bernanke can't debase it away with his printing press.

He can't print boatloadss of gold like he can print boatloads of currency.  We're smart enough to see that.   You're not apparently.  Dumbass.  Moron.

Let's talk again when the rest of the world drops USD as world reserve currency and it just fucking crashes.

How much will your treasuries be worth then? 

The answer of course is they'll be worth the same number of dollars they were before.

But those dollars won't buy a pack of gum.

We're smart enough to see that.   You're not.  

So go ahead, buy treasuries.  We'll buy gold. 

MeelionDollerBogus's picture

what if I bought $100 billion in treasuries then used it as collateral for margin leverage and rehypothecated that same amount of Treasuries in London more than 10 times and used it for margin EVERY single time? Now what can I buy?

TraitorsHang's picture

I used to hate your posts. I used to think you were ZH's resident contrarian. Then I read them twice, quit worrying, and learned to love the MDB.


QuasiYoda's picture

Silly man . . .  Gold and Silver are not finished.  If you knew anything of them you would know this period of consolidation is par for the course.  This has occurred after each of the parabolic blowoff tops that have occurred over the last decade. Treasuries are clearly close to the end of their 30 year run.


Look at a Chart before you go spouting such nonsense!

moonstears's picture

3.2% more, to be exact, and since inflations only 2%, why that's $1.20 for every hundred, much better than gold at $1500 a year ago, now $1590, that's almost 6.5%....hey....waitaminute...thanks for the advice MDB, is that sarcasm I detect?

Hobie's picture

I think you're right MDB. I'm going to rush down to the bank and swap all my metals for shares in... Facebook! I should be onto a winner there, right? Or is that AAPL today? Maybe Netflix?

MeelionDollerBogus's picture

o rly?

Interest rates still negative? Yup.

Inflation still over 8%? Yup.

Globally? Yup.

Gold trade is on, bitchez.

Gold, dow, inflation

10 years of gold not nearly out of steam in rising prices

2700 gold on the way

DoChenRollingBearing's picture

Quick as I can write it...

Gold, bitchez!

HungrySeagull's picture

Metals bitches.

Fixed it.

(Includes ammo.)

engineertheeconomy's picture

Precious metals, good farmland, hand grenades, machine guns, land mines and a years supply of hand held ground to air missles, bitchez.

There, now it's really fixed.

flacon's picture

Interesting typo on page 18 chart (pictured above): "2st", "1nd", Quadrant. Obviously it is a FNORD moment, designed to confuse intellectuals with characters after their name, such as "pH-dee" and "B.S.".

Aziz's picture

Where will inflation come from?

Oh maybe the $5+ trillion in excess reserves floating around Asia.

Or the $15+ trillion of credit that excess reserves could be multiplied up to....

Or, you know, maybe a "transitory commodity-driven blip" like war between Iran and Israel.


Son of Loki's picture

'HyperBiflation' is more likely:


"Inflation made here in the U.S. is very, very low," the Federal Reserve chairman told Congress on Wednesday.

"Over the 12 months ending in December, prices for all the goods and services consumed by households increased by only 1.2%," he said.

Around the globe, people are rioting in the streets because of skyrocketing food prices. Health-care costs in the U.S. rise annually by double digits. College, insurance, utilities, the fees bailed-out banks charge their customers, various taxes from nearly bankrupt states and municipalities, basic commodities from pork bellies to gold, and, oh, gasoline -- all of this keeps going up.

But don't worry, Mr. Bernanke swears inflation -- at least as the U.S. government measures it -- will remain low because wages are stagnant. See, there's no need to worry about rising prices, because you're not getting a raise.

On the day Mr. Bernanke spoke, The Wall Street Journal's lead headline read "Inflation Worries Spread." But the story was about rampant inflation in other countries.





ATM's picture

All of that World Reserve Currency paper will roll right back to the USA when the dollar is no longer used as a reserve currency - which means it is already starting.

US Dollars are only going to be good for one thing - buying shit in the USA. Compound that with the Fed buying every piece of shitty worthless "asset off TBTF bank balance sheets adn the dollar number grows ever bigger.

Then when the Fed itself can no longer hide it's bankruptcy they will revalue the dollar v. the only asset that they own that has any real value - gold. when the Fed is broke they will simply change the rules to make their gold holdings worth whatever they want it to be worth. 30k? 50k? 250k/oz it doesn't matter.  

DanDaley's picture

Then when the Fed itself can no longer hide it's bankruptcy they will revalue the dollar v. the only asset that they own that has any real value - gold. when the Fed is broke they will simply change the rules to make their gold holdings worth whatever they want it to be worth. 30k? 50k? 250k/oz it doesn't matter.


Of course the corollary to that is that, because they don't have all the gold -and you do have some, they are going to screw with you in some way, shape, or form.  

engineertheeconomy's picture

They will have us all slaving in a prison labor death camp crammed into a big chicken coop, but it will look and sound like Disneyland and the sheeple will love it.

I think I need to buy a gun's picture

i can't use any of these charts from the last 100 years obviously all ratios and charts over the last 100 years need to be thrown out if we are going to some type of new worldwide system.

DosZap's picture

Or CPI is falsified and real inflation is much higher, and gold went up?

CPI is fudged, real rate is actually 5%.
And that does not count food,or fuel costs..........if it did we would be showing 15%.

youngman's picture

Anyone watching feed stocks...corn and soybeans...they are skyrocketing..if this drought sticks....that higher costs will be passed thru fast in meat products...and wheat, rice will follow.....we could have 30% inflation in food prices...

DanDaley's picture

Buy bags of wheat berries and learn to store it in mylar and plastic buckets.  Good for 30 years at least.  

dark pools of soros's picture

oh no, will the food stamps be raised to keep pace??  at least until elections? 

Peter Pan's picture

Fear of collapse has seen gold reassert itself but all calls for a collapse that have not eventuated have simultaneosly created a sense of complacency.

Gold is stuck between these two poles at the moment and it will only move with determination once the euro has its next major crisis or breaks up and once the USA amd Japan finally hit their fiscal icebergs.

Also do not underestimate the power of a major military confrontation, capital controls or natural disaster to shake things up.

The bottom line is that there is no perfect form of wealth.

VegasRage's picture

The CPI being referred to is the same as what Bernanke always talks about. Core inflation, which conveniently excludes food and fuel from it's caluculations. I submit real inflation is much higher than the shiny happy numbers of 2.5% per annum. 

Whiner's picture

And...and..a perpetual "Confederacy of Dunces", that is to say, our bought and paid for USSA Congress and Community Organiser in Cheif. The Dems are going to hold the senate. Let the good times roll! 2012!