Dollar Devaluation, 40-Year High Inflation: Is Gold Truly Inflation-Proof?

This week, the price of gold has experienced another rapid increase, especially from the lowest point of around $1780 last week, to a peak of $1830 this week.

In this situation, international investment banks and some influential figures from the public have started to encourage everyone to pay attention to gold investment, believing that gold can continue to rise and that gold is an important tool for fighting inflation.

In fact, many people have misconceptions about gold, and the belief that gold can fight inflation is one of the biggest misunderstandings. To a certain extent, this is a big scam!

01

Since the international gold price reached a historical high in August 2020, gold has been slowly declining in fluctuations over the past year and a half.

The recent rise is quite related to the sudden depreciation of the US dollar. However, the depreciation of the US dollar was a bit unexpected and is not expected to last long, probably just a sudden change.

On Monday, the US dollar index fell but not significantly, and then it rose on Tuesday. So in the first half of this week, the US dollar index continued its previous fluctuations without any surprises. But on Wednesday, the US dollar index suddenly fell to 94.

However, I believe that with the continuous reduction of bond purchases by the US dollar and the possibility of interest rate hikes in the future, the US dollar index will continue to rise and will not continue to depreciate.Since the fluctuations in the US dollar index are hardly sufficient to support the continuous rise in gold prices, it is natural for people to look for the reason for the increase in the current high inflation.

The United States has released the latest inflation data, with the CPI reaching 7.0, and the PPI reaching 9.7. This is the highest inflation data in the United States since the early 1980s over the past 40 years.

This 40-year high is not only the highest in terms of numbers but also the highest in terms of levels. Because in these 40 years, the average inflation was only about 2%, and it rarely exceeded 3%. Now it has suddenly reached 7.0, which is not only a simple high level but also a malignant inflation that the Federal Reserve is very worried about.

In the eyes of ordinary people, gold has always been an important tool to resist inflation. Under the current situation of high inflation, investing in gold has become a very good choice. But can gold really resist inflation?

Some Western scholars have done a statistic. In the Babylonian period, the amount of gold needed to buy a pound of bread can still buy a pound of bread today. From the perspective of ordinary prices, the price of bread must have risen hundreds of times since 2000. However, the same amount of gold can still buy the same bread, which fully explains that gold has maintained an anti-inflation level for thousands of years.

This example is also a common example mentioned by many people when they talk about gold's resistance to inflation.

However, some Chinese scholars have also done statistics. In the capital of the Tang Dynasty, the amount of money needed to buy a small courtyard, converted into gold at that time, if kept until today, it is not only impossible to buy a house in Beijing, but also impossible to buy the same house in Xi'an or other medium-sized cities today.

The resistance of gold to inflation has always been an overhyped scam.

03

Similarly, according to Western surveys and statistics, in the past 200 years, among many investment channels, paper money is undoubtedly the worst, but the average 200-year return rate of gold is only 2% per year, far lower than government bonds, and even lower than the performance of the stock market and real estate.If we say that gold is resistant to inflation, it can only be said that the long-term return rate of gold is just about the same as inflation.

In fact, by now we have understood that the inflation resistance of gold is relative to paper money. Cash definitely cannot resist inflation, which is also why we often say that we need to manage our finances and not just hold cash or keep it in the bank.

However, compared with other investment channels, gold is almost the least inflation-resistant. The long-term return rate of bonds is about 4% per year, the return rate of stocks is 6% per year, and the long-term annualized return rate of land also reaches 6%. Compared to these, these are the real investment channels that can not only resist inflation but also outperform inflation.

04

Perhaps some friends say that 200 years is too long, we only care about the present, so if we don't consider the long-term investment value and only look at the short-term investment value, will gold have an advantage?

Many people only calculate the return rate when the price of gold rises, but forget that after the price of gold rises, there is often a wave of decline. For example, in the last round, the price of gold rose to 1850, but then there was a decline for several years, and the lowest point reached below 1050.

Next, the price of gold doubled, rising from 1050 to about 2100, but in the past year and a half, it has already fallen to the current position of 1800.

Such ups and downs are actually the same as other investment markets, with neither one-sided rises nor one-sided declines. If we include several rounds of rises and declines in the calculation, the return rate is still not very satisfactory.

If we happen to buy at the lowest point and sell at the highest point, the return seems good, but if we change to other investment products and buy at the low point and sell at the high point, the return is even more exaggerated.

In fact, speaking of it, the value of gold can only be reflected in very severe inflation or under the disaster of war and other disasters.In times of peace, under the currently moderate inflation, the investment value of gold is not high. Moreover, once gold starts to decline, it often takes several years to bottom out. The current downturn is clearly only in its early stages. If one were to buy gold now, they would be taking the risk of it continuing to fall for the next three to five years. Therefore, investors still need to be very cautious.