Inflation hasn’t done the U.S. economy any favors — but it’s indirectly given the gold market a boost this year, according to Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital.
Although inflation, which remained high throughout 2022 after beginning to escalate in spring 2021, was slightly down in November, at 7.1% year over year, it’s still far from the Fed’s 2% target.
“It’s been a long time since we’ve had this kind of inflation,” DeMeritt says. “You have to go all the way back to 1978 to kind of get to the rates of inflation that we have today. We’re starting to see more and more people become concerned about the value of their currency. Each year that goes by, if I’m losing 7% of the value of my paper money purchasing power, I need something to offset that — and gold is going to be a great alternative.”
Precious Metals’ Sturdy Inflationary Status
In the past, gold prices have often remained strong, despite high inflation. Even between April 1973 to October 1982, when the U.S. was in the midst of its longest U.S. inflationary period to date — prior to entering a prolonged recession — gold’s value rose.
“[It’s] a misconception that if interest rates go up, the gold market is going to fall because it doesn’t generate any interest,” DeMeritt says. “Gold [went] from $50 an ounce in 1974 to $850 an ounce at the peak of inflation in 1980.”
Gold’s value has actually grown 566% since 2001, according to Lear Capital data.
Other assets, however, haven’t always fared as well. The stock market, for instance, hasn’t always shown the same resilience as gold during economically challenging times; it often ebbs and flows in reaction to interest rate, employment, and other large-scale changes. Taking inflation into account, the annual returns the stock market has offered total about 7%, according to the U.S. Securities and Exchange Commission.
“Gold has an inverse relationship to stocks and other types of assets,” Lear Capital’s Kevin DeMeritt says. “In times of war or terrorism, usually you’re going to find the markets become extremely volatile. The volatility of gold is not typically going to be the same as other investments; it typically is going to give you more stability.”
Because stocks, along with mutual funds and bonds, are often part of IRAs — an investment option 58% of 55- to 75-year-olds are using to save for retirement, according to a Pew Charitable Trusts survey — market declines can have a significant effect on investors’ efforts to save for retirement.
Nearly two-thirds (65%) of Americans are concerned about inflation reducing the value of their assets, a recent survey conducted by investment management firm Schroders found. A separate Bankrate query revealed investors say inflation is the top reason they aren’t saving more for retirement this year.
Given the consistent performance precious metals like gold have produced over time, diversifying your investments by allotting some toward physical assets — such as gold, silver, or platinum coins or bars, via a self-directed IRA — could potentially be a way to increase the likelihood of receiving a more favorable ROI, according to Kevin DeMeritt.
“If you look at gold by itself, it’s dramatically outproduced the stock market,” the Lear Capital founder says. “From the year 2000, if you invested $100,000 in stocks, it would be worth around $320,000 today — but if you invested $80,000 in stock and $20,000 in gold, it would be worth $385,000 today.”
Essentially, in that scenario, investing 20% of your assets in gold would have resulted in roughly $65,000 in additional earnings. To view what investment returns over time made with — and without — gold and silver factored into the mix would look like, check out Lear Capital’s IRA Portfolio Comparison Calculator.
A Possibly Robust Future for Precious Metal-Based Investing
Inflation reached its highest level in more than two decades, 9.1%, in June 2022. By November, year over year, it had decreased by 2%, but there’s still a sizable gap between the current amount and the level the Federal Reserve’s Federal Open Market Committee has said it’s aiming for, 2% — which the FOMC feels will ultimately be consistent with the Fed’s directive for price stability and maximum employment.
Yet, as Kevin DeMeritt points out, even 2% can have an effect on consumers’ spending capabilities.
“The Fed’s talking about, ‘Hey, we want to have inflation somewhere in [this] range,’” he says. “Well, that means every year we’re still losing value.”
At the current rate inflation is declining, the route to reaching 2% may end up being a long and winding road — particularly if some of the consumer demand and production woes that have plagued the economy during the past year continue.
“A lot of people are going to wake up to higher interest rates,” Kevin DeMeritt says. “They’re used to 3.5%, 4% mortgage rates, and then rates move up to 7% or 8%. At some point, you’re going to want a new car, and the interest rate is going to be much different than even 6 months ago, ‘I’ll give you 1% interest for the first four or five years to purchase the car is gone.’ Slowly but surely, purchasing power drops through higher interest rates. Your bills go up, everything else is going up; that’s why they’re saying 2023 is going to be the year of the recession.”
Inflationary and other economic challenges could mean investors will flock to physical precious metal-based investments, a phenomenon that played out in 2022.
Gold’s value, for instance, largely increased during the year, according to U.S. News & World Report; in addition to investors expressing a growing interest in the asset, the global price for 1 troy ounce of gold exceeded $2,000 in March — the highest price level it had reached in more than a year.
“We may only be halfway to the top with interest rates, if inflation plays out like it did in the ’80s,” Kevin DeMeritt says. “Inflation could be worse, actually, because the supply chain part of the inflation equation is broken. You’re going to continue to see, over the next five or six years, that demand will continue to increase for precious metals.”