The Reality of “Inflation-Adjusted” Gold And Silver Prices
If you paid attention to the Economics classes, you are probably well aware of the concepts like inflation, real value and nominal value. But just in case, you are not, we are here to simply these terms for you to understand.
Inflation refers to the general increase in prices of commodities. A real value refers to the value of something that is adjusted keeping in mind the inflation. A nominal value is the opposite, it is the value of something that is not adjusted according to the inflation. It is a well-known fact that various components of the economy like wages, interest rates, GDP, asset prices, securities and consumer items, etc. often do not have a fixed price and are subjected to change every financial year, no matter how much or how less. This is because these prices are often adjusted according to inflation, giving us the “real” price of these things.
These adjustments of prices are necessary because it allows for a swift comparison of various different price points at various different points of time of a commodity without distortion. Inflation is also calculated at the internals, keeping in mind the rate of change in the prices of certain goods and services, such as a consumer price index (CPI) or a cost of living index (COLI).
Now that we have brushed up on our basic economics, let us dive into how inflation affects the prices of gold and silver. Believe it or not, these prices have a profound impact and can affect your investments in the way you cannot even fathom.
However, before going into that it is also critical to understand that the variable in any inflation adjustment is “what inflation rate to use” and whether this calculated inflation and its rate and the methodology through which it is obtained “can be trusted” or not. Governments’ interest lies in the generation of lower inflation rate as it makes the economy of the respective country looks better and healthier in comparison to a high inflation rate. Also, it helps in lowering the inflation-related government expenses like pensions, security, and other inflation-related debts.
Central banks also prefer to have a lower inflation rate because it gives an impression of a strong purchasing power of the fiat currency. It also allows them to hide any type of negative stats or debt that may be piling up.
And now that we have talked about fiat currency, it is important to understand that the when a government may decide to print a lot of money, it will destroy the fiat currency, it will lead to higher inflation and at worst, hyperinflation, rendering the fiat currency completely useless.
So, what is the alternative in such a case? You thought it right, gold and silver. The precious metals we love to invest in because they give amazing returns.
Even with the government’s manipulations to interfere with inflation data, the government and central banks, in recent times, have only done things that have resulted in increasing the price of metals like gold and silver.
The banks have adjusted the price of the gold and silver according to inflation. This has resulted in the nominal prices of the gold and silver to be lower in the US dollars than their heir real, inflation-adjusted, price which is on an all-time high currently.
The price of gold and silver have seen much turmoil in the recent times and it is quite pertinent that as the inflation leads to the adjustment in prices, the gold and silver are turning out to be great investments that can lead to great returns in the future.