By Barry Stuppler, a CoinWeek Contributor …….
I have just completed a 40-page booklet with the same title, which I am proud to say was the completion of a 3-year research project. I believe it is the best study of Hyperinflation, Gold Standard and Gold confiscation that I have ever seen and it’s available to read and download at www.coinmag.com.
This study describes the steps leading up to hyperinflation in the US, from leaving the gold standard domestically in 1933 and internationally in 1971 through the recent and ongoing creation of trillions of fiat dollars through “stimulus” and “quantitative easing” programs.
Hyperinflation has happened twice in the US, during and after the Revolutionary War and the Civil War. Globally, it happened 31 times in the 20th Century. One common prelude to hyperinflation (in addition to creating money to monetize national debt) is financing wars by borrowing money.
Although there are many warning signs, when hyperinflation finally strikes, it strikes suddenly, so it’s imperative to prepare before it’s too late. Iran’s rial recently sank 80% against the US dollar. The Iranian government suspended gold trading and closed access to currency exchanges for ordinary citizens.
Owning gold and silver is the best way for investors to protect their capital and even profit from inflation. However, the federal government may take steps that would adversely affect owners of bars and modern bullion coins.
As chairman of the Gold & Silver Political Action Committee (www.goldandsilverpac.com), I’ve spoken with many federal legislators and regulators. As inflation accelerates, measures that might come into effect regarding the purchase and sale of gold and silver bullion include
• Increased reporting regulations
• An excess profit tax
• Export/import limitations
• Imposition of a value added tax (VAT)
When hyperinflation itself kicks in, there are two more extreme actions the federal government might take: gold and silver confiscation, as happened in the US in 1933, or a return to the gold standard.
Pre-1934 gold coins would almost certainly be exempted from gold confiscation, and would be likely to greatly rise in value if there were a confiscation. In the event of a return to the gold standard, the value of bars and modern bullion coins would be fixed by the government, but pre-1934 coins with numismatic value would have the potential to further rise in value.
Everybody has a picture of hyperinflation—frantic searches for basic necessities and wheelbarrows full of paper money come to mind. In 1956, economist Phillip Cagan famously defined hyperinflation as an average monthly price increase of 50% or more. At that rate, a $10 item would cost $1,946 just one year later. Unfortunately, most of the 31 episodes of hyperinflation in the 20th Century followed the Cagan model.
Ordinary inflation precedes hyperinflation. Many politicians, Fed governors, economists and pundits (the same ones that said the housing crisis would be restricted to subprime mortgages and would be over in a year) say inflation is low and under control. They point to Bureau of Labor Statistics (BLS) data showing the Consumer Price Index (CPI) running at 2.2%.
The BLS uses complicated social assumptions and mathematical formulae to arrive at the CPI. These assumptions and calculations have changed over time. Shadow Government Statistics reports that if the rate of inflation were calculated today as it was in 1990, it would be 5.8%. If it were calculated based on 1980 metrics, it would be 10%.
I assume that, like me, you buy food, gas, clothes, health insurance and/or medical care, and pay or have paid for college tuition. Based on real life, do you agree with the official BLS data that the rate of inflation is low?
From November 2002 to November 2012, despite the Great Recession, the index of all commodities (including metals, grains, agricultural products, oil, and coal) is up 202%. Do you believe manufacturers and processors are eating those costs rather than passing them on to consumers?
|Central Bank Gold Purchases|
Are central banks concerned that the US dollar and other major currencies are undergoing devaluation? Until 2010, the world’s central banks were net sellers of gold. Suddenly, they turned into net buyers. Central bank leaders assure us that they have inflation under control, yet they buy gold. Actions speak louder than words.
Central banks, including the Fed, operate on the assumption that their chief weapon for fighting inflation is increasing interest rates. They tend to believe that even tiny increases in interest rates will curb inflation by slowing economic growth and giving investors alternatives to buying gold and silver as inflation hedges. However, in the 1977-1980 gold bull market, the price of gold rose even while the prime interest rate reached 11% and tripled with the prime at over 15%. That bull market ended without hyperinflation. A combination of historically high interest rates and wage and price freezes sent the country into a recession and gold into a bear market.
The United States is in a different place today, facing stiffer global competition, higher federal deficits and national debt, and more committed to stimulating the economy through prolonged low interest rates. In 1980 the US federal debt was below $1 trillion. With its debt now above $16 trillion—and having to constantly borrow money to make debt payments—it’s virtually inconceivable that the federal government would allow interest rates to approach those levels, unless the US dollar were already essentially worthless as a result of hyperinflation.
I talked about the importance of owning pre-1934 gold and silver coins. I also advise my clients to own physical gold and silver as opposed to ETFs or mining shares. My booklet goes into this question in detail. Here, suffice it to say that ETFs are paper assets which, under the social and economic disruption accompanying hyperinflation may well be inaccessible (or, worse, not fully backed by precious metal). As for mining shares, the very factors that cut into mining profits—labor strife and shortage, energy costs, environmental regulation, nationalization, tax increases—make physical gold and silver scarcer and drive their prices higher.
It may take 3-4 years, but as the velocity of money going through our economy increases, it will drive down US unemployment and reenergize our real estate market. However, we will also see serious global inflation with a high likelihood of hyperinflation within the United States. By the time we reach that stage many of the central banks of economically strong nations such as China, India, Brazil and Russia will have exchanged much of their US Dollar holdings for gold, helping push the price of gold to over $6,000 per oz. We are also likely to see some governmental regulations, restrictions, limitations or additional taxes on gold investors by that point, in an attempt to slow the exodus from paper money. The price of silver will be over $100 per oz. How much over will depend on the strength and speed of the global economic recovery and any barriers to ownership implemented by western nations.
For a detailed examination of the evidence for hyperinflation and my conclusions about how to survive it and prosper, please read the full report, available free at www.coinmag.com.
Barry Stuppler has been a professional numismatist for over 50 years and is well known as an advocate for collectors and investors. He has helped thousands of first-time and experienced coin and precious-metals investors and collectors become successful. Barry is the current chairman of the Federal and California State Gold & Silver Political Action Committee (www.goldandsilverpac.com) and is in constant communication with legislators and lobbyists regarding political events that affect the rare coin and precious metals community.
The past president and a lifetime member of the 30,000-member American Numismatic Association, Barry currently serves as president of the California Coin and Bullion Merchants Association. Barry also serves as a board member of the largest association of professional numismatists, the Professional Numismatists Guild. He co-founded and is a current board member of the Industry Council for Tangible Assets, which represents the coin and bullion community in Washington DC.
Barry publishes articles and a daily blog at www.stupplerblog.com, along with other educational materials on Stuppler & Company’s rare coin and precious metals website, www.mintstategold.com. You can reach Barry directly at 888-454-0444 or [email protected].
We could see increased reporting regulations, or VATs, and it wouldn’t mean hyperinflation is just around the corner. War debt, however…
While I do believe that we will be in for a period of inflation, I only hope that you are wrong with your research for we would fare no better than Germany ater WW I. My question for you is that while you believe that pre 1934 gold would hopefully be treated as numismatic value, would that not open up the door also to modern gold coins from the mint that are also marketed and sold as numimatic items? Just curious since most of pre 34 was intended as circulating coinage and I am just wondering how they would then differentiate the definition. Personally, I think that all numismatic offerings could benefit in value from any type of government intervention in any way.