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Will Covid-19 Lead to Hyperinflation?

Few in the West under the age of 50 have experienced any sort of inflation as was seen in the 1970s and in other periods which the older seem to be so fearful of.  Due to policy changes inflation was like an illness with a vaccine, only seen popping up in some unfortunate developing nations.  Now with the COVID-19 pandemic and the various national stimulus packages that various governments have been implementing, the worry about potential inflation resulting from an economic policy designed to curb the pandemic has again returned.

The premise is quite simple: with the health measures taken to choke off the spread of the virus, production of products and services has been hit. Inflation could result from excess money being paid for too few goods and services.  Many factories and production industries have been hurt. It isn't only medical supplies that are in short supply. US meat and pork production has greatly hampered with the closings of packing facilities where virus outbreaks were concentrated.  Workers have begun to strike at Amazon and Instacart distribution facilities demanding safer conditions and higher pay for risky work. This reaction is likely to be seen even more as fearful employees are asked to return to work.  This lack of goods due to supply issues alone could raise prices but there is another issue.

Governments have been throwing money at the problem in an effort to prop up the injured economy.  According to an article in the Economist, “the European Central Bank has grown by €550bn ($600bn), or nearly 12%, and that of the Federal Reserve by nearly $2trn, more than 40%.”  Now, similar measures during the 2008 global financial crisis did not lead to inflation, but when this is combined with the supply shortfalls may very well change that dynamic.

In the US states have been competing against each other to purchase required medical supplies.  For the time being, most items have fortunately been in abundance, besides the odd cleaning supply or toilet paper.  With citizens staying at home, even with supply interruptions, demand has been minimal for many goods and services.  Oil, plane travel, and hotels are the best examples of the short term deflation that has happened.  In March,  annual consumer price inflation slowed in the Euro area, compared with February rates.  In a paper by Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván Werning a potential “Keynesian supply shock” could be seen, where demand falls by more than supply but then rebounds.  As economies reopen, rehired workers could spend a high share of their incomes on things they have not had for months; and demand from earners whose incomes were never affected by the shutdown could overwhelm a slowly recovering supply.

These inflationary pressures will be seen as the virus is beaten.  Problems with the current economic structure will also be seen. For example, the inequality that is concentrating income with the rich who don’t spend it, safety nets likely to be created by governments to decrease the severity of future pandemics, as well as more progressive taxes enacted to pay down the large government debts will redirect income towards freer spenders, opting for higher economic growth and low unemployment which creates inflation.

With uncertainty, the best decision is to move assets to a less volatile choice.  Unlike paper currency and stocks, physical precious metals like gold and silver are resistant to inflation because they derive their value differently than paper currency.  Governments are choosing to print more money, at an even greater rate, to prime the economy, the supply of precious metals only increases with minimal mining production.  Inflation can cut into a portfolio just as much as any other form of risk.  Gold, silver, and other precious metals can be a safe way to avoid these pitfalls and keep a wise investor immune from the forces of hyperinflation and inflation.