The High Cost of Hockey Sticks
We have all heard gold is a hedge against inflation. But what does that mean to us in real terms we can grasp and tangibly understand in our daily lives?
What you are looking at is called a hockey stick graph of the estimated Consumer Price Index from the 1665 to 2013. We can see a historical flat trend, except for the inflationary effects of wars, with a trendline always maintaining and returning to a consistent baseline for hundreds of years. Interestingly, those spikes in loss in purchasing power prior to 1913 coincided with the printing of paper currency into the money supply to fund war spending.
Simply stated, prices go up because the purchasing power of our money is eroded and lost due to inflation. And inflation is nothing more than paper currency that is printed and put into circulation at greater and greater numbers, thereby diluting each dollar’s value. So did goods and services suddenly become more expensive to produce and distribute? No, it just takes substantially more dollars to get the exact same amount today than it did previously. And that inflationary growth is exponential, meaning it is doubling the overall effect over shorter and shorter periods of time. And that is what you see in this graph: a sudden turning upward in momentum leading to an accelerating and near vertical graph line. That is what is meant when you hear that the dollar has experienced a 96% collapse of its buying power since 1913. In other words, a dollar then now has about 4 cents of purchasing ability in today’s world. And that pace of erosion is increasing at incomprehensible speed. And that is called an unstoppable hockey stick graph acceleration.
And what was the stabilizing factor for money before? Why was it that for hundreds of years in our Republic one generation after another experienced virtually no price increase? Because gold was the basis of all money, and was in fact money itself. It cannot be printed at will, is hard to produce and it is virtually impossible to rapidly increase its supply for short-term political purposes.
Ever since the aggressive proliferation of the amount of dollars into circulation began in 1913, and especially since the complete de-coupling of our currency from any gold backing in 1971, gold has been used as a dependable hedge, or safety net, against the collapsing dollar. Why? Because its value has never been debased and therefore retains its purchasing power decade after decade. In fact, gold has always preserved its purchasing power over the long run. The classic example of the long-term value of gold is the $20 Saint-Gaudens Double Eagle gold coin. Prior to 1933, our grandparents carried this coin in their pockets as money. Back then, they could buy a tailor-made suit for one double eagle, or $20. Today, the Saint Gaudens coin, which is worth at the very least $1300, , can buy the same tailor-made suit.
Granted, the price of gold has become more volatile as the world moved off the gold standard since the 1930s, but as Steve Forbes recently stated, “Gold is volatile because monetary policy is volatile. Gold is a constant, like the North Star.”
That is why, ultimately, gold is an inflation hedge. When gold declines, it means less inflation down the road. When gold goes up, it means more inflation ahead. A recent Wall Street Journal editorial stated, “We think this gold boom represents an investor bet on future price increase.”
What is gold predicting now?
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