Gold Price During HyperinflationUnder the conditions characterized by price increases “so rapid and out of control that the normal concepts of value and prices are meaningless”, what would happen to the price of gold?
Let’s start by defining hyperinflation…
“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” (source)
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In addition, hyperinflation is described as “an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless.”
The latter description is much more characteristic of the potential threat that most people envision when they invoke the term hyperinflation.
Before answering that, let’s look at what happened to the prices of bread and fuel.
The lady pictured above is stuffing German marks into her wood burning stove. Such action was cheaper since the paper currency would burn longer than the amount of firewood they could afford to buy with the worthless ‘money’.
During a period of stabilization for approximately six months during 1920, 1400 German marks was equal to 1 oz. gold. Three years earlier the ratio was 100 marks to 1 oz. gold.
However, a fourteen-fold increase in the ratio of marks to gold was nothing compared to what was about to happen.
“By July 1922, the German Mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923, it was at 1,100,000 to $1. It reached 2.5 trillion marks to $1 in mid-November 1923, varying from city to city.” (source)
Using the ratio of 1 trillion marks to the US dollar in July 1923, the equivalent price for one ounce of gold was 20 TRILLION German marks!
HOW IT HAPPENED; WHAT IT MEANT
Germany (Weimar Republic) had rejected gold convertibility and abandoned the gold standard prior to the end of World War I. Since their obligations to pay reparations resulting from their activities during the war required them to remit funds in hard currencies, they continued to ramp up the presses.
Any plans to borrow money had been abandoned earlier. They printed whatever marks were needed in order to buy other currencies which they could use to pay their obligations, and hopefully chase away the inflationary effects of their efforts.
Here is another example of how those effects translated in real life…
“A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. “If you want to save money,” he was told, “and you want two cups of coffee, you should order them both at the same time.”
If we use a price of 5 cents per cup of coffee in US dollars, then the ratio at that time was 140,000 marks to $1. Even though the worst was yet to come, this still represents a 27,900 percent increase in the price of a cup of coffee from five years earlier.
At one point in 1923, the price for one loaf of bread was more than 200 billion marks.
WHAT’S THE POINT?
Some (not just a few) people today think that the higher the gold price goes, the richer they will be. That is not the case.
One ounce of gold in 1920 was the equivalent 1400 German marks. Three years later, that same ounce of gold was priced at the equivalent of 20,000,000,000,000 German marks.
If you were prescient enough to secure to yourself one ounce of gold before the fun started, you could have become a multi-trillionaire almost overnight. Great!
Now, how will you spend your money? Better get something to eat first before tackling a plan for your finances. You could buy a loaf of bread for two hundred billion marks and a cup of coffee for fifty billion marks.
If you buy the loaf directly from the baker, you might score a free cup of coffee. Nobody even knows what price to charge for a cup of coffee anyway, and the baker desperately needs to sell that bread. He is only inclined to make that offer if he is paid in gold, though.
You decide to buy five loaves since you don’t know how much bread will cost next week. You give the baker 1/20th oz of gold which is the equivalent of one trillion marks ( 5 loaves x 200 billion marks = 1 trillion marks). You and your friends enjoy drinking the five free cups of coffee and you break bread with them.
You are not as jovial as you were before your purchase, though. You know that you are not as rich, either. Doing some quick math, you realize that if you spend 1/20th oz gold every day, you will be a pauper again in three weeks.
What you could buy with your gold after its price went up did not make you rich. The value of your gold is the same as it was three years earlier. The price for the bread and coffee is the same as it was just a few years earlier: 1/20th oz of gold.
If you own gold and are betting on a much higher gold price because you expect hyperinflation anytime soon, don’t expect to be any richer than you are now. The higher price for gold will only compensate you for the loss in purchasing power of the US dollar
(also see Gold’s Singular Role)