A recent study done by the World Gold Council (WGC) shows that gold has become a mainstream source of investment. The WGC report dubbed the Gold retail market insights shows that the precious metal has now gained a strong global presence. The published report has an analysis of the results of a survey done amongst 18,000 people. The survey’s respondents are spread across the key gold markets of Germany, China, the US, Russia, India, and Canada. Inflation in China 2019, world instability and political uncertainty make investors turn to gold.

One significant insight gleaned from this survey is that 60% of all respondents agree that gold is a durable and safe store of value, albeit a traditional one. The study also highlights the fact that gold has been purchased at one time or the other by over 50% of all fashion and lifestyle buyers as well as retail investors.  

It was found that gold has been touted as the answer to the economic risks associated with currency speculation and inflation. Buyers, especially in China, Germany, and the US, purchase gold because they trust its value holding capability better than they trust fiat currencies. In China, 69% of all buyers trust gold more than they do currencies, while 60% and 57% of the US and Germans share this sentiment.

These buyers have said that they believe gold will safeguard them against the rigors of runaway inflation. Gold, therefore, makes them feel more secure in long-term savings. Indeed, gold they say currencies, as trustworthy an investment as is steel or oil. This sentiment, however, does not come as a surprise because the Chinese, Germans, and US citizens have all at one time in their history been exposed to the adverse effects of government ran poor fiscal policies.

Inflation in China 2019

The Chinese, for instance, view inflation in China 2019 as a scourge and are obsessed with keeping the country’s inflation level below four percent. The country has a longstanding history of war against inflation. Today, consumer prices are still rising, clarifying that Beijing is losing its battle against hyperinflation. In October, for instance, the prices of goods rose to the highest rate witnessed levels in the last eight years. This rise has been partly caused by an outbreak of African swine fever sweeping across the country, decimating its pigs.

China’s consumer price index (CPR) consequently rose to 3.8 percent, drawing very close to its four percent maximum inflation benchmark. This is the highest the CPI has been since early 2012. This spike in food prices comes at a time when China is also fighting the US in what is becoming a rather protracted trade war. 

Consequently, producer prices have steeply declined for the last six months, the sharpest fall in production in two years. The Chinese government, terrified of inflation, is intervening to guarantee supplies and stabilize prices. In the past, the government employed interest rate and bank reserve ratio hike and even went further and placed price controls on a variety of goods to maintain a market balance. 

Many analysts say that Beijing’s fear of inflation in China 2019 stems from the view that the runaway inflation rates of the 1993-6 inflation era that had price increases of up to 25% quickly followed it partly stirred the Tiananmen protests of 1989. The hyperinflation in China during the student-led insurrection was as high as 18.25%. Additionally, the Communists won the Chinese civil war of the late 40s against the Kuomintang government because of the latter’s era of hyperinflation, which robbed the middle class of their wealth. Since China’s 1979 economic opening, the country has gone through three massive bouts of hyperinflation. The 1985 broad-based inflation period had an inflation rate of 10%, while the already mentioned 1988 to 1989 period had a 20% inflation rate. The 1993 to 1996 inflation era that had price increases of up to 25% quickly followed it.

Hyperinflation Renders Fiat Worthless

Periods of high inflation, are characterized by increased prices of goods and services across an economy. Measured using the CPI inflation is very distinct from standard price increases in the economic sector. It is rather defined by price hikes across a wide range of services or goods, which, if too high, can cause political and economic destabilization.  Economy-wide shocks escalate excessive inflation in the production of products and services, that imbalance supply or demand.  

The phenomenon often leads to shortages, hoarding, and panic buying as consumers purchase products en masse in fear that prices will keep rising. Some of the most common causes of inflation include fiscal and monetary expansion, a prevalent practice today amongst many central banks. Inflation, however, can also be caused by blockades, war, sharp labor or demographic shifts or unexpected drastic government policy shifts.

Beijing understands the consequences of inflation in China 2019, especially its ability to activate political and social instability.  A government founded on a one-party system cannot stand rising social discontent, which often leads to disgruntled opposition elements. Inflation can encourage a rise in disparate groups and social protests at the same time, which in time can become a political powder keg. The Chinese Communist Party thrives on unity and is part of the reason economic growth is its main focus. The determination to keep the Chinese currency as stable as possible is part of the reason China has been hoarding gold by the tons. 

Perhaps few recorded episodes of hyperinflation are as bizarre as Germany’s from 1922 to 1923. It is believed that the most significant hyperinflation period in German history started in 1914. World War 1 had broken loose, prompting the German government to expand its money supply to cover its war efforts costs. It is in this period that the government sold off war bonds to its citizens and cut off the link between the price of gold and the German mark.  

The consequences of this action were drastic. As an illustration, the exchange rate of the mark to the USD was 4.2 to one in 1914. By 1923, one USD was worth billions of marks. Rapidly printed fiat quickly flooded the streets, lowering the value of the currency and consequently increasing the prices of goods disproportionately. The price hike in products was unmatched by wage rises. By 1923, a single loaf of bread would cost billions. Wages were ferried home in wheelbarrows, and children used the printed notes as play toys. Eventually, most Germans abandoned the currency, placing their faith in tangible assets such as gold or barter trade.

Gold as a Store of Value 

The US has, nevertheless, never faced such levels of hyperinflation. Indeed the closest the country has come to experiencing hyperinflation, was during the 1860 to 1865 Confederate states Civil War. Its economy has maintained relatively low inflation rate, below 2 percent, for the last two decades.  The country has nonetheless known the effects of rapid deflation. Deflation, the negative of inflation happens when prices in an economy plummet to the ground. The most considerable deflationary period in the US occurred in the 1930s in the Great Depression. 

It is therefore not a surprise that a large portion of investors in Germany, China, and the US trust gold more than they do their native currencies. When asked which financial instruments that they have invested in in the past, and would do so again in the future, 60% of them chose gold. The report also says that of the surveyed respondents, 51% of them associate holding gold with bringing good luck. This trend, however, changes with the younger generations, between 18 and 22, who seem to be disassociating from the allure of gold jewelry.

Close to 40% of them chose cryptocurrency investing, with about 23% of the respondents from Generation Z age group saying that crypto was to them a short term investment option. It is therefore quite possible that gold-backed crypto will be one of the best ways to reach Generation Z and influence them on the virtues of gold investments. 

Gold-backed cryptocurrencies are tied to the value of gold, meaning that they have intrinsic value. They are quickly becoming the new frontier in gold investing since they make it easier for investors to purchase gold via blockchain. It is rumored that China is building its gold-backed stable coin, which analysts say will countercheck the effect of the USD, which Putin claims has been weaponized in recent times. 

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