Setting the definition of the terms used in the title as a foundation, is a commonly applied method in research. The chicken and egg conundrum being at full play, if the title is being derived from the review or the review is the product of the framework set in the title. The 100 Year Marathon is a review of Gold, as in the metal and its powerful role in the ecosystem that is understood as the overall economic market. More particular how it is facing up to the task of protecting ones purchasing power. The view that is taken on Gold stretches over a century, hence the 100 years. The marathon in this instance is the relentless destruction of purchasing power of everyone’s pocket money.

The marathon as one of the foundational Olympic disciplines, going back 2500 Years, is majorly a challenge of endurance, holding the steady pace over the long-haul, some 42 Km. Not something you wouldn’t know already. The inflationary effect of governmental currency policies are as relentless in pursuit, going over a very stretched period of time and the finish line being at a vague distance, just as one would find in a Marathon. Gold on the other hand is THE ultimate long distance contender in the Olympics of finance. Reference could be made here to the Millions of years it takes the universe to create the mineralization or that it has been used by Humans for 5000+ Years as a medium of exchange. Focus in this particular review is the relation of Gold in its alleged role to counter the decline of purchasing power in governmental FIAT Currencies. The relentless marathon of currency dilution vs Gold going on for decades with no end in sight.

Currency dilution being a measure by central banks to fuel the economy, mostly trying to artificially balance the natural economic cycles, with inflation being an effect caused by it. This results in loss of purchasing power and is constantly working against everyone’s hard earned savings. Inflation and purchasing power having an inverse relationship. This might seem obvious yet it is generally overlooked in terms of wording and understanding. Inflation is always stated as positive value, lets say +3%, the price increase of the basket of goods and services that can be bought with a given currency unit. This term could also be inversely stated to make the meaning more obvious. One can buy 3% less of services with the same amount of money. Inflation and its inherent causal effect on purchasing power can be very plainly put as follows:



  • The burn in your wallet
  • A constant sting that something has gone missing
  • Currency dilution by counterfitting
  • The destruction of savings
  • loss of purchasing power
  • Constant Cost by the issuer of currencies
  • and so forth…..


Overarching concept, there is a cost that comes with holding a currency, its being inflated away, permanently and irrevocably.

For ease of explanation the increase in price of the underlying basket of goods is called “The Inflation Runner”, the inverse effect being the loss of purchasing power - more details on the distinction later. As can be obtained in Figure 1, The Inflation Runner has different gears and torquing, very dependant on the current state of financial markets and money policies, sometimes running at a higher pace and sometimes slowing down. The important thing to note is that anyone trying to get ahead has to surpass the Inflation Runner first just to make a step into positive territory. Its effect is also compounding year over year. This being an important take-away in Figure 1, summarizing the Inflation values over the 50 Years. There was only one very, very slight deflationary year, 2008, which is also questionable, if looked at in more detail. Further there is a strong compounding effect over the wider time-span, shown in the grey bars increasing at an almost linear angle, getting a sharp increase over the most recent 4 Years. Germany has been taken as a proxy for Europe in this instance, other economic ecosystem are looked at in the following chapters.


Figure 1: Inflation and its compounding effect


Summarized final values after the 50 Year period are stated in Figure 2, also the Formula to be applied to calculate the Remaining purchasing power. 1 Euro from 50 Years ago, or currency unit from back then in pre-euro times, is pretty close to being only worth 1/4 of the starting value in terms of purchasing power.



Figure 2: Final Values 50 Years and remaining Purchasing Power



In any given moment the Inflation Runner is setting the pace as a denominator that has to be overcome to move ahead. Conversely, if no effort is made to run past or keep up with the Inflation Runner, just standing still, one is constantly loosing ground.

The Inflation Runner, is always decreasing your progress by the pace he is setting. Compounded, adding to the decrease each year. If one does no fight it, outrun this benchmark, he is constantly loosing ground. Not even staying equal. Let alone getting ahead, which is only achieved by any value higher than the pace the Inflation Runner denominates.

To recap, this is the associated hidden cost holding money. It can also be described as FIAT currencies carrying an inherent weight, the inflation of the prices leading inversely to a gravitational pull that is constantly working on its value destruction. Permanently. Gravity can be fierce, much more on that later.

The most common scenario for private households is not having a counter-play, standing still, hence being pushed back and down. The harsh compounding effect, year over year, of loss of purchasing power is seen and felt mostly in a longer term perspective. The boiling frog syndrome being an applicable metaphor. To quickly outline, a frog that is suddenly put into boiling water gets out quickly, full reflexes to avoid impending death. On the opposite, if the frog is exposed to only mildly warm water, followed by small incremental increases in temperature, no reflexes, not even a knock against the pot, certain, inescapable death for the frog.


Moral of the story: When our living conditions deteriorate gradually, we adapt to these conditions instead of getting rid of them, until we are no longer strong enough to escape.


This being the most common scenario with savings of private households, no effort or counter-play is put into action, while The Inflation Runner is always on duty. If the overarching message would sink-in, starting now in 2025, that over the next 50 Years ones purchasing power is divided by 4, 5 or even 6, interventions would be a logical conclusion. Just as the frog would immediately jump out of the water with a temperature high enough to indicate certain death for him.


Main Questions of the Review

With the inherent costs of FIAT currencies, a Gold-inflation nexus has been a very established theory in finance. This review will be looking into the details of the question if Gold is indeed an effective hedge against inflation. Its role in this discipline remains controversial.

Gold is supposedly a store of value, in global terms, independent from governments or location. Unlike most commodities, this shiny metal has played a major role in the history of money and monetary policy. It has been used as a tangible medium of exchange for Millennia. The precious metal always had a pronounced role as a store of value throughout human history.

With increasing importants of government money policies and its negative effects on currencies, the hedging ability of Gold against Inflation, or to rephrase the alleged safe haven for ones purchasing power, is explored by looking at the following questions:



  1. What is the relationship between the price of Gold and inflation? How stable is it – over time and across measures of inflation?
  2. Does Gold preserve purchasing power better than money?
  3. Is Gold preserving purchasing power in a higly inflationary environment?
  4. Under What circumstances is Gold outpacing inflation or when is it better to hold money?


This review is part of a series, dividing the 100 year Marathon into 3 Episodes:



  1. Past 75 Years, after the fact and how Gold has been behaving as a counter-play for inflation
  2. Near Term future Outlook, up to 2030
  3. Longer Term future Outlook, up to 2050


A 100 Years can be referred to as the potential lifespan of humans, being very ambitious here. This time-frame will be used as a reference, starting in 1950, +100 Years, ending in 2050. At time of writing being close to exactly 3/4 of this time-frame. First is a backwards perspective going back -75 Years, the after the fact perspective, then looking out to the future for the next, 5 and then 20 years, as visualized in Figure 3.



Figure 3: Time-line


The century being a very applicable term in this instance, for investors, and also people as a whole, preparations have to be made to even reach the point of potentially being 100. This, in essence, requires making decisions looking out to the future very strategically, not getting lost in daily tactics and habits, preventions, instead of reacting when its too late.


Background

When Einstein concluded the Equivalence Principle in 1907 he probably was not exactly pondering the idea of Gold and its relation to FIAT Currencies purchasing power. I am absolutely certain young Albert, being on top of his game, would have found something truly remarkable on that end also. Whilst it is worth trying to re-purpose one of his most foundational theories in physics for understanding the question at hand.



Figure 4: Some sort of force


Einsteins theory describes that resting in gravity feels the same as accelerating in space! To rewind this description, in his finding gravity is indistinguishable from acceleration. Assuming this statement is true, as in a physics, Einstein & Science true. What are pre-requisite and surrounding conditions that have to be met?


To give a very quick recap of this conceptual idea. Figure 4 above is showing a person in a box throwing a ball forward. It goes to the ground of the box. The physical force at play, as to why the ball is going to the ground will be already moving into the second part of the explanation of Einsteins concept.


What young Albert was pondering for some years, if there would be any difference that can be proven in the two following cases, shown in Figure 5 below:


  1. Person in a Box - feels the force of gravity, like on earth
  2. Person in a Box - is accelerating in space, and feels as if experiencing gravity


In his finding, inside the box, in both cases objects would behave as if there was a gravitational field. Also in the second case, the acceleration in space, if you drop the ball, it will fall to the ground of the box just like it would fall to the ground on Earth.



Figure 5: Equivalence Principle


To apply this theory into simple terms for the sake of describing the relation of Inflation to purchasing power and monetary devaluation. You will feel the burn in your wallet, indistinguishable and fully equal to one another, in case:


  1. Inflation is accelerating, and the prices of goods and services increase

[Effect of Acceleration = a]


2. Currency is declining, you lose purchasing power by dilution

[Effect of Gravity = g]


Both are indistinguishable in their effect. Since both can be understood as the same. In the following we will be looking at the aspect, of protecting purchasing power by converting and holding Gold, and avoiding a gravitational pull of the FIAT currency or perhaps even being part of a counter acceleration.


The equivalence principle points out the uniformity of acceleration and gravity. The complete absence of any acceleration or gravity is:


  • The sensation of weightlessness, when there is no net force acting on an object.


The conceptual ideas to take away, Inflation and its acceleration are the same as the currencies loss of purchasing power. The constant monetary policies of governments and central banks are always creating a net force that is permanently pushing & pulling on a given currency. Hyperinflation would be something as a super acceleration, creating higher G-Forces. Earth`s Gravity, 9.8m/s2, in higher multiples, completely annihilating purchasing power of a currency with an unbearable weight. We get to such an example later.


So much as a heads up, Gold and its related purchasing power is in the longer term in a state of weightlessness, it stays in shape - over the longer period. More on this important distinction later.


Gold’s Performance

Without further digression, Figure 2 is reflecting the almighty Gold Chart going back 50 Years. After the fact perspective. Price of an ounce Gold measured in USD. There is a clear observation to be made, the price was more or less flat until the 70s. It was pegged to the fixed amount of 35$ / Ounce for converting USD to Gold. The USD was established as Gold backed currency, a proxy for Gold as monetary means of exchange. In 1971, president Nixon and his administration made the decision to end the fixed conversion rate and thereby marking the end of the USD as a Gold backed currency. The USD transitioned to being part of a fiat currency system. Leaving one Gold backed currency in place, which is represented only by the shiny metal itself.


Since then, starting from the 35$ Mark / Ounce of Gold, the price has moved up roughly 80x Fold, moving higher as we speak. To grasp this idea, having bought Gold for 500,- USD in 1970 at 35$, would now be worth ~40.000,- USD.



Figure 6: 50 Year Gold Chart


To establish full understanding for the coming propositions, to asses the real value, as in purchasing power, Gold has to be adjusted for inflation. A test and pondering, any other investment needs to hold up against also. As every runner in the marathon has to outpace the decline in purchasing power in the FIAT Currency it is measured in. Figure 7 is reflecting the inflation adjusted Gold chart. Less steep in ascend, and showing longer-term periods in which Gold is declining in purchasing power, meaning you can buy less with the same amount of Gold. Or to rephrase, the USD that Gold is measured in, is holding stronger vs its competitor Gold in protecting purchasing power. The very lows on the other hand are very similar, and Gold has retraced from a steep initial increas in the 1980s. It peaked there for 32 Years. There is the timeframe, coming from the absolute High, the topping pattern, in which your purchasing power would have declined faster than holding money.



Figure 7: Inflation adjusted Gold Price


In the next Figure 8, we will see how the inflation adjusted Gold price is holding up against the currency itself, in preserving purchasing power. The former observation of the declinging 25-30 Years get a much different context. As mentioned before Gold was coming from the very top. It is key to highlight this period in more detail to establish understanding Golds role in preserving purchasing power.



Figure 8: Gold in the US Inflation Race


One additional Chart has been compiled with all same related values, but cutting out the initial steep increase of Gold in the early 1980s in Figure 9. Here the effect becomes more obvious, Gold has underperformed holding money for 20 Years, before picking up again, completely regaining its former value. In every longer term timeframe Gold has acted in this way to regain Ground, completely and overcome former losses. The USD has steadily declined on the other hand a simple, almost linear gravitional pull to Zero.



Figure 9: Without initial peak


Moving into the ecosystem of Turkey and the Turkish Lira, the data that could be concisely compiled was going back to 1997. Leaving one question untouched, if the performance vs Gold in preserving purchasing power would have been even more drastic than already gathered by this data. To sum things up, its complete annihilation of the currency value. This being a very good example, there could even be better ones, how the gravitational pull of central bank policies is working against the purchasing power a currency. This being equal to G10+ forces in our gravity metaphor. The inflation rate was 80% sometimes consecutively for years. Gold in real terms, always adjusted for inflation in its purchasing power has been dancing around the 100% value, meaning it kept the inital purchasing power. In comparison the Lira ended at 0,18%, so Gold has performed 350 times as good in preserving purchasing power. @Erdogan, something went off-track there. In this observation Gold has performed exceptionally well in keeping value stable and stationary in a Hyperinflation environment.



Figure 10: Inflation Race, Turkey


Japan and the Japanese Yen is an interesting case because it had deflationary periods, prices not going up, but everythig getting cheaper. Low birth rates and the Japanese community saving up, instead of spending, led to a very stable price in the Yen. As said with some deflationary years. Gold has moved ahead in terms of value against the Yen, in a beatiful, steady increase. The Yen staying put at around 100% Gold has 9x folded in real terms, uplifting the purchasing power of its owner significantly.


Figure 11: Inflation Race, Japan


Comparison notes to other notable investments


S&P 500

  • There are periods in which the leading position is exchanged, pivoting in favour from strong stock-markets to more commodity driven periods. The change-overs in the markets are becoming obvious in the Figure 11
  • To allow a comparison in terms of performance values both indicators have been kept un-inflation adjusted
  • The performance values can digress significantly for years, whilst the overall trend in total performance is relatively similar, at least to what the chart is indicating, at time of writing, and considered over the very long haul. Thats a lot of IF´s and this statement is very questionable to make, more dynamics than reflected only in the performance values are at play.
  • SPX is dividend paying stocks, performance in nominal gains is not depicting this
  • Economic cycles play a very significant role in the SPX & Gold Nexus
  • SPX is related to economic growth, boom times
  • In the absence of growth in the economy SPX would be underperforming, vice versa


Figure 12: Gold vs S&P 500


  • This picture is drastically changing when looked at in different time horizons, as depictedin Figure 12. In the perspective of the last 15 Years, SPX fastly dominated the performance.
  • This can also be reflected in a ratio, this will be looked at in more detail in the next review, indicating an anticipated CRE - Capital Rotation Event; the overall financial changes in in the ecosystem, moving capital away from one sector to another, in this case from the general stock market into commodities.
  • The outpacing of the SPX may have lasted long enough and the ratio could change into Golds favour, this is speculation at this point.


Figure 13: Recent 15 Years in comparison


Figure 14: Gold vs Housing Prices


Figure 15: Gold vs Silver


Final Conclusion


What is the relationship between the price of Gold and inflation? How stable is it – over time and across measures of inflation?

A: As Gold is denominated in a given currency, price inflation is assumed to have a strong correlation to the Gold price. It was found there is no linear correlation as commonly assumed with Gold being denominated in a given currency. Its not a perfect hedge, in a mechanical sense, as in always cleanly correlating and following the same direction as Inflation. Gold Price has many more dynamics and can be lagging the inflationary acceleration, or even decrease in valuer for longer periods. A key finding in this review is that albeit not having a perfect linear correlation, in all given financial currencies Gold has outpaced Inflation in the long-haul, everytime, and even accelerated much more into positive territory. Significantly, when valued in real-terms, as in purchasing power. A distinction is to be made clear, albeit not being a perfect inflation hedge, it serves every attribute as as store of value over the longer term with keeping purchasing power. These are two distinct aspects. Its not a hedge, its something else, more powerful.


Does Gold preserve purchasing power better than money?

A: Absolutely, in all 3 different currencies; [USD; TRY; JPY] Gold has kept and increased its purchasing power, taking into account the decrease of value of the currency itself Gold has performed up to 10x comparing the final values after some 25 - 50 Years. E.g. in Yen purchasing power stayed close to 100%, while Gold in real terms 9 folded.


Is Gold preserving purchasing power in a higly inflationary environment?

A: While Gold does not fully protect purchasing power in the face of such high inflation, Gold performs notably better than the given FIAT currency. This demonstrates its role as a hedge against inflation, albeit not a perfect one to balance each given year, while it preserves purchasing power over the longer term, as stated by the example of Turkey and the Turkish Lira. Compared to the losses in value of the currency its performance is off the charts.


Under What circumstances is Gold outpacing inflation or when is it better to hold money?

A: Observation is that time and market selection are the keys to allow Gold to act as an inflation hedge. We have illustrated how the relationship between Gold and inflation changes over time and that Gold is not a mechanical linear counter play, especially following a sharp increase of Gold and a top being marked, if entered at such a point, Gold may be underperforming vs holding a given currency e.g. the US in the 1980s. If these patterns are avoided, there would be rare cases in which holding money is a superior solution to preserving purchasing power vs holding Gold.