In the realm of investments, gold has always been particularly appealing, usually hailed as the best defense against inflation and economic turmoil.
Notwithstanding many financial crises and changes in the economy, gold’s function as a safe-haven asset has stayed mostly unquestioned.
Gold remains a desirable investment choice in both inflation-adjusted terms and in respect to change in the money supply expansion.
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Historical Gold Performance Using Inflation-Adjusted Terms
When inflation-adjusted, gold’s performance over the years presents a striking picture:
Following the 1971 Nixon Shock, which broke the Bretton Woods system and the convertibility of the US dollar into gold, gold’s price jumped. Although the nominal price of gold reached $850 per ounce by January 1980, in inflation-adjusted terms this amounts to almost $3,000 in today’s currency. Acting as a true store of value when paper money loses value, this era proved gold’s ability to soar under severe inflation.
Early in the 2000s, gold prices dropped to a nominal value of roughly $264 per ounce, which, inflation-adjusted, was much less than their 1980 peak. But the next years saw gold’s comeback, especially in the 2008 financial crisis and the 2010s inflationary pressures, where gold once more demonstrated its value as an inflation hedge.
Recent Trends: Gold prices have not yet exceeded the 1980 peak when adjusted for inflation, suggesting opportunity for further increase should inflation rise once more, even with the present high nominal prices.
Gold and Dynamics of Money Supply
The link between gold and money supply emphasizes even more their investing attractiveness:
Gold prices and money supply expansion have a historical link. The rise in money supply tends to depreciate fiat currencies as central banks all around engage in monetary expansion, sometimes through quantitative easing. Given its limited quantity, gold becomes more valuable in such circumstances. Periods like the 1970s and the post-2008 financial crisis where increased gold prices resulted from growing money supply prove this.
Gold as a Hedge Against Currency Depreciation: Gold historically shows an increase in demand when money supply increases faster than the economy results in inflation. Turning to gold, investors guard their riches from the devaluation of money. Particularly in a long-term perspective from 1971 to 2023, posts on X have shown how gold’s value has kept pace with global GDP and inflation, therefore this tendency is not only theoretical.
Current Economic Environment: The factors that historically support gold could resurface as central banks maybe return to aggressive monetary programs to fight economic downturns. The continuous debates on inflation, economic recovery following COVID-19, and geopolitical concerns support gold’s position as a wise investment even more.
Looking through the prism of inflation-adjusted returns and money supply, gold’s historical performance confirms its purchase character. Although short-term volatility persists, long-term tendencies indicate that gold not only preserves value but may also appreciatively increase in inflationary conditions. This makes it a must-have element of a diversified investment portfolio, particularly in uncertain economic times or when debasement of currencies becomes a plausible possibility. Gold still shines as a proven asset for those trying to protect their buying power.
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Shayne Heffernan
