Archives for November2011

Hyperinflation Warning, Preserve Value With Gold

John Williams:
The Gold Report:

Among the specters lurking in’s Editor John Williams’ gloomy outlook for the U.S. are the demise of the dollar, hyperinflation and the ongoing lack of political will to take sound corrective measures. Still, as he tells The Gold Report in this exclusive interview, investors have options. Williams contends that turning to gold, silver and strong foreign currencies would protect wealth and position savvy investors to take advantage of extraordinary opportunities likely to flow out of the turmoil ahead.

Excerpts from the interview:

TGR: Let’s go back to gold. According to your research, the September 2011 high of $1,895/oz gold was below the historic high of $850/oz in 1980, if the 1980 figure was adjusted for inflation. The $850/oz in 1980 would have equaled $2,479/oz in Consumer Price Index–all Urban consumers (CPIU)-adjusted dollars, or $8,677/oz Shadow Government Statistics (SGS)-alternate-CPI-adjusted gold prices in 2011. Is gold underpriced if you put it into that context?

JW: On that basis, yes, it is. It also depends on when you measure it. My hyperinflation report looks at what has happened to the dollar over a longer period. Since President Roosevelt took the U.S. off the gold standard domestically in 1933, the dollar has lost 98–99% of its purchasing power. People tend to forget that. But if you look at the gold price movement since 1933, it actually has moved a little more than the government-reported pace of inflation. My estimate of what inflation should be if we had consistent CPI reporting shows that the loss of the dollar’s purchasing power against gold is the same as it is measured by the CPI.

So over time–and this is true over millennia–gold tends to maintain purchasing power, which means it holds its value net of inflation. Not that you’d break a piece of gold down to a small enough unit to buy a loaf of bread, but if you did, it also would have bought a loaf of bread in ancient Rome.

TGR: For the same amount of gold.

JW: Same amount of gold. Gold has a long tradition as store of wealth. That’s why–globally–gold generally has been viewed as such. It only got bad press in the U.S. because private ownership of gold was outlawed after Roosevelt’s action. It became legal for Americans to own gold again after Nixon abandoned the international gold standard. Yet, even today, some on Wall Street discourage investment in physical gold, largely because they cannot make a commission on it, as they do with stocks and bonds.

Given the gold ownership limitations after 1933, those in the U.S. who wanted to buy gold turned to buying gold stocks. But because of what happened in the 1930s–that’s now two generations or so ago–gold as an investment and as a hedge to protect wealth lost some of what had been its commonly recognized value in the U.S. Outside the U.S., almost everyone views gold as a traditional hedge.

TGR: That’s physical gold. What about exchange-traded funds and gold equities in the juniors? Will those investments also preserve wealth?

JW: I wouldn’t count on the financial system working as it should. I look at physical gold, preferably sovereign coins, not only as a store of wealth, but also for purposes of liquidity.

Gold stocks also should preserve wealth over time, but I would look at them as longer-term holdings. There could be periods of systemic failure with resulting interim liquidity issues.

TGR: You talked about hyperinflation coming as early as 2014, or even before that. But 2012 is just weeks away. What can people expect next year in terms of the data you watch and maintain versus some of the government-issued statistics?

JW: I can tell you that the economy is weaker and will remain weaker than the government reports. We don’t have an economic recovery in place. We’ll tend to see higher inflation.

TGR: Something to watch out for. Thank you, John.


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