Is There a Direct Link Between Rising Inflation and a Rising Demand For Gold?

History clearly shows there is a direct link between inflation and gold demand. When inflation jumps, or even when inflation expectations rise, investors turn to gold in greater numbers. When gold demand rises, so does its price and you can guess what happens to gold stocks. Below is a look at the extent of consumer purchases after inflation (and in some cases hyperinflation) took off in a number of countries.

So says Jeff Clark (caseyresearch.com) in edited excerpts from his original article* entitled Inflation Is Coming, What to Do—NOW.

 [The following is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Clark goes on to say in further edited excerpts:

We’ve all heard of the inflationary horrors so many countries have lived through in the past. No country in history, third-world countries, developing nations, and advanced economies alike, has escaped the debilitating fallout of unrepentant currency abuse and, as such, we expect the same fallout to impact the U.S., the EU, Japan, China—all of today’s countries that have turned to the printing press as a solution to their economic woes.

[I am sure you would agree that] it seems obvious to us that the way to protect one’s self against high inflation is to hold one’s wealth in gold [so it begs the question] Did citizens in countries that have experienced high or hyperinflation turn to gold in response? Gold enthusiasts may assume so, but what does the data actually show? Well, Casey Metals Team researcher Alena Mikhan dug up the data. Here’s an analysis [of what happened in 9 countries where inflation raised its ugly head].

1. Brazil

Investment demand for gold grew before Brazil’s debt crisis and economic stagnation of the 1980s. However, it really took off in the late ‘80s when already-high inflation (100-150% annually) picked up steam and hit unsustainable levels in 1989. During this period, investment demand for bullion skyrocketed 333%, from 20 tonnes in 1976 to 86.5 tonnes in 1989 and…when inflation began to reverse [there were] substantial liquidations, showing demand’s direct link to inflation.

Source: The International Gold Trade by Tony Warwick-Ching, 1993; inflation.eu
*Measured from December to December
**Year-end rate

2. Indonesia

Indonesia was hit by a severe economic crisis in 1998…[with the] inflation rate spiking to 58% that year. Gold demand doubled as inflation surged...[with] total demand reaching120.8 in 1999 (not just demand directly attributable to investment), 18% more than in pre-crisis 1997…Once inflation cooled, so again did gold demand.

Sources: World Gold Council, inflation.eu

3. India

While India has a traditional love of gold, its numbers also demonstrate a direct link between demand and rising inflation. The average inflation rate in 1998 climbed to 13%, and you can see how Indians responded with total consumer demand. (Specifically investment demand data, as distinct from broader consumer demand data, is not available for all countries.)

Sources: World Gold Council, inflation.eu
*Includes net retail investment and jewelry

Gold demand hit a record of 774.4 tonnes, 13% above the record set just a year earlier. In fairness, we’ll point out that gold consumption was also growing due to a liberalization of gold import rules at the end of 1997. When inflation cooled, the same pattern of falling gold demand emerged.

4/5/6. Egypt, Vietnam, United Arab Emirates (UAE)

Here are three countries from the same time frame last decade. Like India, we included jewelry demand since that’s how many consumers in these countries buy their gold.

Sources: World Gold Council, indexmundi.com

Egypt saw inflation triple from 2006 to 2008, and you can see consumer demand for bullion grew as well. Even more impressive is what the table doesn’t show: Investment demand grew 247% in 1998 over the year before. Overall tonnage was relatively modest, though, from 0.7 to 2.5 tonnes.

Vietnam and the United Arab Emirates saw similar patterns. Gold consumption increased when inflation peaked in 2008. Again, it was investment demand that saw the biggest increases. It grew 71% in Vietnam, and 27% in the United Arab Emirates and, when inflation subsided, you guessed it, demand fell.

7. Japan

Prime Minister Shinzo Abe’s plan to kill deflation pushed Japan’s consumer price inflation index to 1.2% last year—still low, but it had been flat or falling for almost two decades, including 2012.

 

In response, demand for gold coins, bars, and jewelry jumped threefold in the Land of the Rising Sun. One of the biggest investment sectors that saw increased demand, interestingly, was in pension funds.

8. Belarus

Unlike many of the nations above, citizens from this country of the former Soviet Union do not have a deep-rooted tradition for gold. However, in 2011, the Belarusian ruble experienced a near threefold depreciation vs. the US dollar. As usual, people bought dollars and euros—but in a new trend, turned to gold as well.

We don’t have access to all the data used in the table above, but we have firsthand information from people in the country. In the first quarter of 2011, just when it became clear inflation would be severe, gold bar sales increased five times compared to the same period a year earlier. In March alone that year, 471.5 kg of gold (15,158 ounces) were purchased by this small country, which equaled 30% of total gold sales, from just one year earlier. Silver and platinum bullion sales grew noticeably as well. The “gold rush” didn’t live long, however, as the central bank took measures to curb demand.

9. Argentina

Argentina’s annual inflation rate topped 26% in March last year, which, according to Bloomberg, made residents “desperate for gold.” Specific data is hard to come by because only one bank in the country trades gold, but everything we read had the same conclusion: Argentines bought more gold last year than ever before. At one point, one bank, Banco Ciudad, even tried to buy gold directly from mining companies because it couldn’t keep up with demand. Some analysts report that demand has continued this year but that it has shown up in gold stocks.

What to Do—NOW

History clearly shows there is a direct link between inflation and gold demand. When inflation jumps, or even when inflation expectations rise, investors turn to gold in greater numbers and, when gold demand rises, so does its price— and so does that of gold stocks.

Conclusion

With the amount of money the developed countries continue to print, high to hyperinflation is virtually inevitable. We cannot afford to believe in free lunches.

The conclusion is inescapable: One must buy gold (and silver) now, before the masses rush in. The upcoming inflationary storm will encompass most of the globe, so the amount of demand could push prices far higher than many think—and further, make bullion scarce…

 [Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.caseyresearch.com/cdd/inflation-is-coming-what-to-do-now (© 2014 Casey Research, LLC. All rights reserved)

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