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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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Tue, 07/10/2012 - 10:07 | 2601897 Antifederalist
Antifederalist's picture

It is called a draw down.  If you need to sell at that point it is a bummer.  If you do not have your full allocation it is an opportunity.  The point here Squeeky is that all investing success depends upon your time frame.  Buying at $1,600 and not understanding WHY you bought and then selling in a draw down is dumb.  Two time tested rules about investing.  1. The future is uncertain.  2.  Time will pass.  The first issue is measuring risk against reward.  The second issue is what is your time frame.

Assume you have savings or an excess of "money".  You can put it into many things.  Guitars.  Dollars.  Gold.

Yes, after the last bull market in gold it lost half its value very quickly.  Although, prior to that it had gone from $35 to $800 so a buyer at the beginning of that bull market had made 22 times their original investment.  A whole lot better than just holding dollars.  Even after that correction that buyer still had made 11 x their investment.  In fact, gold never went below $250 so the buyer at $35 was still up 7 x at the bear market low in gold in 2000.  Would it have sucked to buy at $800 and see a quick 50% loss?  Yes.  But there is only one instance of that in the past 32 years.  So, what are the odds of that happening regularly?  Eh, Squeeky?


Tue, 07/10/2012 - 02:44 | 2601263 TheFourthStooge-ing
TheFourthStooge-ing's picture

Antifederalist said:

Arguing with you is like trying to teach algebra to a 3 year old.  You have not addressed any of my points and you don't even understand the answers.

It's not the first time. The pattern is a repeat of this:

I therefore conclude you are hopeless.   You really have no idea what you are talking about.

...and like a true reporter, there is a dead set opposition to learning, which confirms your assessment of hopeless.

Tue, 07/10/2012 - 01:51 | 2601226 TheFourthStooge-ing
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SqueekyFromm, popping another anti-gold boner, said:

Sooo, (and here is the PARADOX) a GOLDBUG can NEVER tell you the truth about the value of GOLD, or even admit that it worth less than he paid for it, or he loses money.

Soooooooo, have you never heard of market pricing, or voluntary transactions???????? Your specious argumentation reveals not only your lack of understanding of these things, but your unwillingness to learn as well. Typical of reporters nowadays.

Sooo, why would a smart person ever listen to anything a person who owns GOLD says about GOLD???

Soooooooooo, why would a smart person ever listen to anything a person who owns GUITARS says about GUITARS???????????

A Goldbug can never be relied upon to provide you an unbiased opinion about the value of Gold.

A musician can never be relied upon to provide you an unbiased opinion about the value of music or musical instruments.

A rice farmer can never be relied upon to provide you an unbiased opinion about the value of rice.

A reporter can never be relied upon to provide you an unbiased opinion about anything which requires knowledge of the subject matter.

Somehow this is all going to be tied back to your fetish with television advertisements for gold. I just know it.

Tue, 07/10/2012 - 07:38 | 2601489 Freegold
Freegold's picture

And here is the OPINION PARADOX (Something I invented)

is a person having a strong opinion on a subject he obviously doesn´t understand

Mon, 07/09/2012 - 22:06 | 2600851 celticgold
celticgold's picture

memo to squeeky fromm.......take some of your FIAT CURRENCY and exchange it for some LUBE......

Mon, 07/09/2012 - 22:49 | 2600878 SqueekyFromm
SqueekyFromm's picture


Well, your very mean comment needs a poem:


She Told Me So

A poem by Squeeky Fromm

Though I critized her with aplomb.

When she said that Gold might be a "bomb",

And I snarked (and I blundered)

Now Gold's at three hundred!!!

OH, please forgive me, Squeeky Fromm!!!


Squeeky Fromm, Girl Reporter



Tue, 07/10/2012 - 07:26 | 2601454 prole
prole's picture

Also do you realize that in America gold buggery is an extreme minority percentage of the people? Maybe 1 to 3% of American people who own any physical gold at all (besides a few krappy rings or etc?)

So you find the one website where this small percent of Americans huddle, and bash them there? Any other place you couldn't even find any gold bugs in Amrka. You do realize that gold bugs have heard it all before, for years, about gold being a bubble, about no return on gold, no dividends etc etc... We have heard it all before and ignored it. I suspect if you went to China or India or any Arab country where gold is universally held and valued (above paper? I might be stratching it there) and tried to peddle that "Gold about to crash" song and dance they would consider you quite zany.

Tue, 07/10/2012 - 14:28 | 2602944 SqueekyFromm
SqueekyFromm's picture


This is hardly the "one website" where Gold Bugs huddle and fondle their gold. Most of the time I just read all the Gold Hyping and just pass by it and shake my head and giggle. About like I would in China and India and Arab countries where they also value Rhinocerous Horn as a cure for penile flacidity. Except that I really feel sorry for all the poor little Rhinoceri who get murdered for nothing.

Squeeky Fromm, Girl Reporter 

Tue, 07/10/2012 - 23:29 | 2604718 fuu
fuu's picture

That sig sounds familiar.

Mon, 07/09/2012 - 22:26 | 2600905 fromthedeepersouth
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The bulk of this analysis is from 1975 to 2012t.  The economy during this time will be nothing like the economy that will exist if the currencies fail, and its hard to see how they can not fail.  The extreme uncertainty that's developing is what is driving the demand for gold and will continue to drive it until we hit bottom.  its anyone's guess when we're going to hit bottom and how long we're going to stay there, but from my perspective its going to be a longterm problem.  the imbalances in our economy are so large that it will take a lot of time for them to be destroyed and a new economy to emerge.  gold will be key in preserving wealth during that renewal period.  This wasn't the considered int he article above, so to me the article doesn't mean much.

Mon, 07/09/2012 - 23:40 | 2601071 SqueekyFromm
SqueekyFromm's picture


I agree with you that this time is shaping up to be different from what I have read about the past.  But here is another question for Goldbugs. Suppose you have 100 ounces of gold for which you paid $1,000 per ounce. A $100,000 "investment." Assume a high rate of inflation, and one which is constantly increasing, heading toward probable hyperinflation. Now:

1. When and how do you get your purchasing power input back out of the gold, at breakeven or profit???

Do you sell 10 ounces for $50,000 when the inflation rate hits 500% and where now $50,000 is the same purchasing power as the $10,000 you invested originally in those 10 ounces???

If so, you break even, TODAY but what happens if the 500% rate goes to 550% the following month and you still have most of the $50,000 in your mattress.

Now, you are scared, and very timid about those other 90 ounces of gold that you have. Sooo, inflation is beginning to go exponential on you. Do you sell the gold or hang on to it afraid to gamble on cashing in. Now, the inflation rate is 1000%, and if your gold holds value, it is worth $10,000 per ounce.

But, as prices go up, commodities and necessaries go up in scarceness. It might take $1000 to buy 2 days worth of groceries. Do you now swap an ounce of gold for 20 days worth of food???

I submit that if you have the means, you will hold off trading in gold for cash due to the uncertainty and the realization that the value of the cash will decline daily.

AHA, you say. Now is the time for bartering with your gold. But who will want the gold??? Who can swap you 20 days worth of food for that one ounce???

I am betting that this will be a time of scarcity, and people will not have the goods to swap necessaries for a piece of shiny metal, that they can not turn into cash without the same problems that you have. 

Now, we get to the end of the hyperinflationary period, and you still have your 90 ounces of gold, having learned to bar-b-que sewer rats and squirrels to survive, along with becoming a connoisseur of black-eyed peas. Can you now turn those 90 ounces into a value equal to or greater than the purchasing value of the $90,000 you  put into back a few years earlier.

Again, I bet not, because most likely the new currency, in which $1.00 bills are the redenominated equivalent of the $1,000,000 United States of Zimbawe dollars, and the whole country is still in a period of deflation where the new dollars are kept scarce, lest they reignite the hyper-inflation.

People with money, now want farmland, and black-eyed pea canning factories and mules and plows.

That is my take on it, and some of the problems you will have.

Squeeky Fromm, Girl Reporter

Tue, 07/10/2012 - 00:18 | 2601134 dogbreath
dogbreath's picture


if you survive the army(ies) in the streets, zombies,  the revolution, the gulag, flouriide in the water, the new plauge, the death squad and other random murder,  the next new government with the solution,'ll have it made.

Tue, 07/10/2012 - 02:29 | 2601246 Temporalist
Temporalist's picture

Squeaky just ask yourself if you had one ounce of gold or silver, or a gold coin from antiquity, would they be worth anything today?  Would they still have value and be accepted anywhere in the world to exchange for currency whatever country you are in?


The answers, in case you don't realize, are yes.


That may lead you to understand then that gold and silver are money, real money, not money by decree to pay taxes in the country you reside.  They are international money, with no boundaries or nationalities, with the added benefit of being recognizable, fungible, divisible, indesctructible, and the inability to debase (i.e. create from thin air).


Your problem is that you value money too much in the sense that you think $1600 is a lot of money.  Just because it can purchase something now does not mean that it will purchase the same thing tomorrow.


Don't get caught up in some end of world hypothetical which may or may not happen.  People don't buy gold just because they think it's going to save them they also buy it because it lasts, for like thousands of years, and can be handed down generationally.


When money is strong, in other words when governments aren't papering over their problems to provide bread and circuses to placate the masses, gold value is reflected in the strong currency.  If you see the trend of debasement ending however, then gold may drop, but it will still be worth something.  If however you don't see that trend ending anytime soon then the value of gold to fiat will continue to rise.  It has risen before the crisis in 2008 and the crisis has gotten more complex and worse and now has the added problem of proven fraud in multiple levels of finance and government. 


How do you exchange blackeyed peas with another blackeyed pea farmer who doesn't want your peas?  There is a unit of exchange and if there is a loss of confidence in fiat what will you use?  The reason gold and silver are money is because they organically were accepted as such over trial and error and their inherent properties.  People made gold and silver money.  Humanity chose it as money it wasn't dictated to be although at times it was governemt issued.


Don't foget too that people that aren't physically able and young who cannot work a farm but perhaps can exchange other services like crafting clothing will also not just want barrels of peas or a mule and plows but would rather have a unit of account and exchange instead; one they don't have to worry about spoiling, running away, feeding or getting sick or rusting and breaking down and can be easily transported and stored.


Your "take" is one that assumes that "goldbugs" love gold not that they recognize its utility and history.  They are not armageddeonists and gold is not a religion it is a simple solution to a complex economic problem and has been proven to work and always returns indifferent to the foibles of humanity.

Tue, 07/10/2012 - 03:06 | 2601284 Temporalist
Temporalist's picture

Oh and when you buy land you can't just buy and sell it.  The government taxes it and prevents you from using it as you wish sometimes.  You also can't carry it on your back and there is a potential that it can be destroyed or confiscated through no action of your own (pollution, industrial accident, eminent domain).  Lawyers cost money, people on your land can sue you as you are liable for what happens on it, insurance, etc.  And land is not guaranteed a return on investment.  Not many things guarantee a return on your investment either, not stocks or bonds or savings or land or anything really except bicycles, exercise, a book...simple things that really aren't investments in the first place. 

Tue, 07/10/2012 - 03:26 | 2601295 SqueekyFromm
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You said:

"Your problem is that you value money too much in the sense that you think $1600 is a lot of money.  Just because it can purchase something now does not mean that it will purchase the same thing tomorrow."

That really gets to the heart of the problem I have with Gold. $1,600 is NOT a lot of money if used to purchase some things. For a Hummingbird Guitar, it would be cheap, about 1/2 or so of what one is worth. For 3,000 pounds of rice in bulk, it is relatively cheap.

But what is being used for in the sense we are discussing here, is for one ounce of something that has little or no utile value, in the hopes that some future person will pay more in purchase value. But, as you said, "Just because it can purchase something now does not mean that it will purchase the same thing tomorrow."

From what I have seen from reading a little about it, gold is historically up and down all over the place. It seems to increase in value during times of fear, and then go down in calm times. This makes me strongly question what it is that I am buying, and what I am buying it for. 

You, and others, are probably right that some people will always find it valuable, and it will never be worth nothing. However, if it declines to $400 an ounce, I bet many people will be pulling out their hair and not at all comforted by the fact that it is not "worth nothing." There is a chart I found at Market Ticker which I think should make people think long and hard before buying at current prices:

It is the one with the red line thing from 1973 to 2010.

Squeeky Fromm, Girl Reporter

Tue, 07/10/2012 - 04:16 | 2601328 Temporalist
Temporalist's picture

It has utilty as money. And as I'm sure many have pointed out to you time and time again gold is not what increases or decreases in value but rather fiat paper currency that does.  Gold is The Numeraire (look it up).

You are clearly being disingenuous.


If you are or were a reporter you'd be horrible at your job as you obviously have no objectivity.


You should probably not read ZH any more as you know all the answers and find guitars to be much more valuable than what is global currency.


You have not listened to what I have said or anyone else for that matter that is trying to explain it in simple terms to you.


You are selective in your arguments and what you choose to respond to.


Go buy a guitar and learn how to play and when I see you on the street begging maybe I'll throw you a silver dime...but you'll probably spend it as $0.10 instead of $2.70 because of your myopia.


Tue, 07/10/2012 - 06:23 | 2601387 sudzee
sudzee's picture

In 1971 if i sold an ounce of gold for 35.00 icould fill my gastank 3 times. Today an ounce of gold fills my tank 32 times. Same 1 ounce of gold but the value of papermoney dropped by 90%.

Mon, 07/09/2012 - 22:46 | 2600954 celticgold
celticgold's picture

fromm (squeeky) .... now i'm in love with you ... and ..i will bring the LUBE for you on the first date bb.... muuuuaaaahhhhzzz

Mon, 07/09/2012 - 22:48 | 2600955 celticgold
celticgold's picture

double trouble !

Tue, 07/10/2012 - 01:37 | 2601204 J U D G E M E N T
J U D G E M E N T's picture

Unless you did not know it, Money IS gold AND silver as defined by the United States Constition.

Cash, or Federal reserve notes are claim slips for the underlying commodities(money), again (Gold and Silver)

These notes were generated to protect the citezenry from theft of their money by placing it in a centrally located

safehouse called a BANK. The bank then gave you a BANKNOTE, and you could come back and claim your money

when you needed it for repayments of debt. (again, the U.S. Constitution defines Gold and Silver as the only legal

means of repayents of debt.)

The U.S. government illegally mandated gold illegal, and replaced the backing (Gold and Silver) with your Faith.

(Secret deal with the Fed to create an ellastic money supply.)

In this way, the U.S. Government was able to PRINT MONEY (Not Gold and Silver, see above) out of thin air for the

express purpose of paying their own debts, (Which is illegal, (See repayments of debts above)), and buying private

assets with the illegal FIAT MONEY.  What you have now is a situation where the people who control your elastic money

supply can buy anything they want with a printing press.  Consolodation, empire building, all built on a FAITH in the backing of

the most popularly heald BANKNOTE system.  When Nixon removed the Gold backing of the U.S. Dolar in 1971, that should

have been the end, I dont know why the system has survived. (See bretton woods and Petro dollar)


What we all need to do now is trade all the banknotes in for REAL money again

and  only accept legal forms of repayment, as defined by the Constitution.


But let me be sarcastic for a minute.  Lets assume these old BANKNOTES really do have the VALUE you think they do.

Lets assume that the FAITH that you and all others place in them substantiates your claims.

Lets say I take all the CASH I have and take them to a place where I know they will be safe.

Let's call this place a bank.  (Who would have thought). Ok, now I place my CASH in storage in the bank and get a claim slip

for the deposit of the underlying commodity(CASH). I now start trading them with all the other people who think BANKNOTES

have value.  And lets say I rack up a few debts. I now need to pay for those debts with CASH.  And now, lets pretend a funny thing

happened during this time of faith while I was racking up this debt.  The government makes CASH illegal! (See Nixon and the gold widnow),

and now all I have is a BANKNOTE that says I can go return to the BANK and get my CASH out.  But now.. I cant. All I have is the slip,

will my creditors take the BANKNOTE or claimslip to the underlying commodity of CASH in the bank that no longer will give me cash for

my clamslip?  I doubt it, all my CASH is now gone and all I have left is FAITH that they will. What if the creditor says no?  Then you have a

situation where all of your REAL MONEY(LOL)(CASH) has been stolen by the goverment. And what you get is a piece of paper with no

inherrent value.  Now that isnt very nice.  And I would have rather put all my CASH into my matress, or in a home safe.  At least I would

have kept my CASH safe.


Try now replacing the word CASH in the above paragraph with GOLD or SILVER and see what you think of it then.









Tue, 07/10/2012 - 03:34 | 2601305 SqueekyFromm
SqueekyFromm's picture


If somebody wants to give me GOLD, then I will take it. And then probably sell most of it. But there is no way I am going to pay $1,600 per ounce for it betting on the come. I am "parted from my money" a whole lot, but even I have my standards.

Squeeky Fromm, Girl Reporter

Tue, 07/10/2012 - 08:18 | 2601575 MeelionDollerBogus
MeelionDollerBogus's picture

At such a low price knowing in short time it will be 2500 / oz I'll gladly pay 1600.

Tue, 07/10/2012 - 04:37 | 2601336 Beam Me Up Scotty
Beam Me Up Scotty's picture

This sounds exactly like the social security trust fund. The money is gone. All that is left are IOU's. Nothing but a promise to pay. But pay with what?

Tue, 07/10/2012 - 02:02 | 2601236 dojufitz
dojufitz's picture

When asked  what is Gold?

Did JP Morgan say,

  • 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”.
  • No...he simply said 'Gold is money and everything else is credit'.

    The truth is a higher Gold price solves more problems than it creates.....and i'm talking $10,000 plus.....


    Tue, 07/10/2012 - 02:38 | 2601258 cynicalskeptic
    cynicalskeptic's picture

    You all DO know that the Fed and others have expanded MOPE operatiosn to postings on various media sites.....   made easier by the huge numbers of unemployed willing to work for 1 cent a work shilling the official line...........

    Explains the volume of posts from some - and their frequency.

    Tue, 07/10/2012 - 04:30 | 2601333 foxenburg
    foxenburg's picture

    He left out one important reason to own gold - anonymity. 

    Tue, 07/10/2012 - 04:41 | 2601340 Beam Me Up Scotty
    Beam Me Up Scotty's picture

    +1 million!! People are willing to give up there physical dollars for digital ones and use plastic. There is no anonymity when you use plastic. When your anonymity is gone, it is much easier to control you.

    Tue, 07/10/2012 - 04:32 | 2601334 EmileLargo
    EmileLargo's picture

    Who is the biggest gold bug on this forum? I have 90 percent of my liquid assets in physical gold.

    Tue, 07/10/2012 - 07:41 | 2601494 EmileLargo
    EmileLargo's picture

    I read through this piece of "research." There are some interesting things of value there but for the most part it is another attempt at making a mockery of gold as an investment - the old Keynesian hatred of the "barbarous relic" persists. The bit I found funniest was "research has found no co-relation between the monetary base and inflation." Excellent. with geniuses like these writing "economic research", no wonder we are in the mess that we are in.

    Tue, 07/10/2012 - 08:03 | 2601523 doc_in_the_house
    doc_in_the_house's picture

    sept 2011 = gold @ 1900+ = i said SHORT !!

    i'm not a stupid technician...but i called it a DOUBLE TOP...ok maybe just 3% of me..the rest being fundamental, speculative, gut feeling and the majority being a mind reader of the manipulators (central bankers and govt) and contrarian against the cheerleaders.

    when gold @ 1900 i called it a double top and shorted GLD.  then it dropped to 1800 and marc faber said:  "DON'T PANIC".  i said i don't care what he says..its a short !!

    its now @ 1600 or so....@ 1450 its a take your short profits....its not going straight down to sub $400....= buy physical gold..not paper gold @ sub $400 and hold til $5000+

    Tue, 07/10/2012 - 08:17 | 2601571 MeelionDollerBogus
    MeelionDollerBogus's picture

    "double-top" and other voodoo "technical" charts = LOL

    how to really do it:

    Tue, 07/10/2012 - 08:15 | 2601569 MeelionDollerBogus
    MeelionDollerBogus's picture

    scatterplots rock - gold vs S&P vs oil (WTI)

    Do NOT follow this link or you will be banned from the site!