Can Gold and Silver Reduce the Risks of Higher Inflation?

February 17, 2018

New York (Feb 17)  Precious metals prices including gold bullion and silver coins are often described as a hedge to higher inflation.  The idea is that if you hold an asset that is immune to the rise in prices of other goods and services, you will benefit if you own gold coins and silver bars.  What is important about inflation is that it erodes the value of the assets you own, especially if your earnings are fixed. Therefore fixed payment securities such as bonds under-perform because the stable coupon you receive buys less goods and services.  What you need to own when inflation begins to percolate are precious metals which accelerate when inflation begins to climb higher.

What is Inflation

Inflation is the increase in the prices of goods and services. The government measures inflation in several ways, but for the most part it is considered a basket of goods and services that most people purchase.  The government reports, such as the Consumer Price Index has many categories, but the two most important are the headline number and the core number. The headline reading is the entire basket of goods and service and the core removes volatile components such as food and energy.

Recent Inflation Data is Hot

The Bureau of Labor Statistic recently reported that the United States Consumer Price Index climbed 0.5% in January, more than the 0.4% expected. The the core rate, which excludes volatile components such as food and energy increased by 0.3% compared to expectations that it would rise by 0.2%. Both readings were hotter than expected. Gains were broad-based. The December headline and core rates were each 0.2% higher which were revised from 0.1% and 0.3%, respectively. The 12-month year over year headline rates were steady at 2.1% for the headline and 1.8% year over year for the core. Internals showed energy rose 3.0% from the prior -0.2%.

Housing costs increased 0.2%, with the owners' equivalent rent measure up 0.3%. Wages and housing are the two most important components evaluated by the Federal Reserve. This type of number will become a focus for the central bank especially if wages continue to climb. Food prices edged up 0.2%. Apparel costs climbed 1.7%. Transportation costs were 1.8% higher. Medical care was up 0.4%.

The chart of gold bullion prices versus inflation shows two different periods. The first shows a 10-year period beginning in 1998 were gold troughed and where inflation measured by the CPI increased by 33%. The accelerating in CPI was matched by a robust 333% increase in the price of gold bars.  During the period from 2009 to the present, inflation has been subdued, increasing by approximately 12%, which coincided with a 28% increase in the price of gold bullion.

Inflationary Pressures

What is important about inflation is the costs that are rising for you. If you rent a home, or purchase gasoline, or shop at a supermarket, rising prices will affect your wealth.  To offset the increase in goods and services, you can hedge your risk by adding gold bars and silver bullion to your investment portfolio.  Wages are already on the rise, which was revealed in the Labor Department’s most recent report.  The Valentines Day CPI showed that housing prices and rents are also moving higher.  The worst scenario is that CPI outpaces wages, which erodes your wealth.  By purchasing gold coins and silver bullion you can offset this erosion.

Courtesy of Treasure Coast Bullion Group


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