Many investors get concerned when they see their assets in the stock market decrease in value. As a result, they turn to gold, silver and other precious metals as a possible answer to hedge against asset volatility and inflation. In short, inflation is the rise in prices of nearly everything and the devaluation of currency. 

History shows that significantly rising price inflation stimulates demand for precious metals and especially gold and silver. The actions by the Federal Reserve over the past year have led many to assume that much higher inflation is a foregone conclusion.  Many central banks, but most importantly the Federal Reserve, print more and more money to create the feeling their economies are doing fine. In order to combat the large quantities of dollars being pumped into the economy and the decreasing value of money, central banks often confront inflation by increasing interest rates. While increased interest rates may seem to boost savings, inflation continues to harm bond funds and savings accounts over a long period of time. 

The precious metal space has a unique relationship with inflation. Precious metals are resilient to inflation because they derive their value differently than paper currency. The value of the dollar is determined by the actions of the federal reserve, central banks, global factors, and the general health of the economy. Central banks print more currency in order to stimulate loans and growth. Circulating more paper currency means a considerable increase in the supply of dollars in the economy. However, without a subsequent rise in demand for more dollars in a more successful economy, the value of each individual dollar gradually decreases over time.

In contrast, gold for example has value because of its scarcity and many modern uses. During times of economic instability or recession when the value of the dollar plummets, investors flock to stable, solid investments like physical gold and silver as a way to store their wealth. As a result, this demand boosts precious metal prices and helps give investors a hedge against inflation and the devaluing of the dollar.

According to Maxim Manturov, the head of investment research at Freedom Financial  Europe, investing in precious metals like gold or silver could help outpace inflation. “Assets like precious metals are great safe havens for your finances because  their value generally appreciates to account for inflation…” 

Additionally, Robert Kiyosaki, author of the best selling book, “Rich Dad, Poor Dad” encouraged investors to buy more gold and silver “while you still can.” On June 28, 2021, Kiyosaki tweeted that financial markets are headed for a drastic downturn and investors should bank on cryptocurrencies and precious metals to weather the fallout. Kiyosaki’s best selling book encourages people to understand their finances, note to rely on others for money, but to accumulate wealth by investing. Finally, Sprott Market Strategist, Paul Wong, stated, “If a high inflation scenario takes hold, gold has more positive convexity or right-tail upside than any single liquid asset.”

Inflation can harm a portfolio just as much as any other form of risk. The declining value of the dollar can put pressure on stocks, savings accounts and bond holdings. Gold, silver, and other precious metals can be a safe way of keeping a wise investor immune from the forces of hyperinflation and inflation. 

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