Understanding Inflation: The Case for Gold in a Shifting Economy

Inflation is a sustained increase in the general price level of goods and services in an economy, corresponding to a decrease in the purchasing power of money. In other words, each dollar buys fewer goods over time when inflation is positive. The U.S. measures inflation primarily by the Consumer Price Index (CPI), which tracks the weighted prices of a broad basket of consumer items. Historically, the U.S. has experienced moderate ongoing inflation (the Federal Reserve considers ~2% per year ideal), punctuated by periods of high inflation and occasional deflation. For example, inflation spiked to over 14% in 1980 during the "Great Inflation" era, whereas it was negative (deflation) during the Great Depression. In recent history, U.S. inflation had remained low (around 2% or below) for much of the 2010s but surged to a 40-year high of 9.1% in mid-2022. This surge – the highest since 1981 – underscored how unusual but impactful higher inflation can be on consumers and investors. (By contrast, the average U.S. inflation rate has been roughly 3% over the long run.)  

One fundamental driver of inflation is the amount of money in circulation relative to the economy's output. The more dollars chasing a given quantity of goods, the higher the prices of those goods will tend to climb. If the money supply grows much faster than the economy's real output, inflation usually follows. For this reason, investors pay close attention to money supply measures such as M2, which includes cash, checking deposits (M1) plus relatively liquid savings deposits, money market funds, etc. M2 represents the broad currency in circulation available in the financial system.

Notably, the U.S. money supply (M2) has ballooned in recent years. M2 was relatively stable for decades but exploded higher in 2020–2021 as the Federal Reserve and federal government took extraordinary measures in response to the COVID-19 pandemic. M2 grew about 19% in 2020 and another 16% in 2021, far above its long-run average growth of ~7%. This surge reflected trillions of dollars of liquidity injections (through stimulus spending, money-printing, and asset purchases). As a result, by 2022, the total M2 money stock reached an order of $21.7 trillion – a historically unprecedented level.

Notably, the U.S. money supply (M2) has ballooned in recent years. M2 was relatively stable for decades but exploded higher in 2020–2021 as the Federal Reserve and federal government took extraordinary measures in response to the COVID-19 pandemic. M2 grew about 19% in 2020 and another 16% in 2021, far above its long-run average growth of ~7%. This surge reflected trillions of dollars of liquidity injections (through stimulus spending, money-printing, and asset purchases). As a result, by 2022, the total M2 money stock reached an order of $21.7 trillion – a historically unprecedented level.

Such rapid money supply expansion has a direct bearing on inflation. In early 2021–2023, the U.S. experienced the highest inflation in decades, partly attributable to this monetary surge (compounded by supply chain shocks). As a rule of thumb, "when money in circulation grows faster than goods produced in the economy, high levels of inflation can occur." During the pandemic, money growth far outpaced the economy's capacity to produce new goods and services, creating an imbalance. The Fed is acutely aware of this linkage – it began reversing its easy-money policies in 2022 specifically to tame inflation by reining in excess money and demand. The episode underscored for investors that vigilance is needed when central banks "print" money aggressively, as it often eventually shows up in prices of everything from groceries to assets.

It's worth noting that the relationship between money supply and inflation can sometimes have lags or be influenced by velocity (how quickly money circulates). For much of the 2010s, for example, the Fed expanded its balance sheet (increasing the monetary base) without igniting significant inflation because banks held excess reserves and money velocity remained low. However, when monetary expansion is paired with strong spending, inflationary effects become visible. The early 2020s were a textbook case: trillions in new dollars, pent-up consumer demand, and constrained supply yielded about 8% CPI inflation in 2022. Prospective precious metals investors often monitor money metrics like M2 as early warning signs – a rapidly rising money supply can be a precursor to rising inflation, against which assets like gold are typically sought as hedges.  

Governments possess a unique and consequential power: the ability to create money (colloquially, to "print" money, physically or digitally). This power can be useful – for instance, to fund emergency expenditures – but it comes with a "dangerous temptation." If too much money is printed, more dollars are chasing the same goods, causing sellers to raise prices. Each dollar becomes worth less as the new money dilutes its purchasing power. Extreme overuse of the printing press leads to hyperinflation, where prices shoot up uncontrollably, and a currency may become practically worthless (historical examples include Weimar Germany, Zimbabwe, etc.). While the U.S. has never experienced true hyperinflation, it has seen periods of very high inflation when monetary discipline lapsed.  

Crucially for investors, inflation acts as a stealth tax on cash holdings. Over long periods, even moderate continuous inflation significantly erodes the real value of a dollar. What does this mean for the investor? It means that holding cash over long periods is a losing proposition in real terms. When abused, the "power of printing money" acts as a force that steals wealth from savers by devaluing each unit of currency. The more dollars the government creates, the less each one buys. U.S. history shows episodes where this effect, while gradual, has been profound. For instance, during the high inflation of the 1970s, Americans saw the dollar's purchasing power shrink dramatically from one year to the next. A dollar saved in 1970 was worth only about half its value by 1980 in terms of goods it could buy. This is why precious metals like gold are often considered a safeguard – they cannot be printed at will, and thus their value isn't directly diluted by central bank policies.

It's worth emphasizing that some inflation (and thus some cash value decline) is intentional – as discussed, the Fed targets ~2% inflation. Over a decade, 2% annual inflation will make a dollar worth about 82 cents today. That gentle decline is seen as an acceptable trade-off for economic growth and avoidance of deflation. However, when inflation runs hot, the loss of purchasing power accelerates. For example, in 2022's 8% inflation environment, a dollar lost nearly one-tenth of its value in just one year. This compounding erosion is a key reason investors turn to hard assets (like gold, silver, and real estate), which historically hold their value better during inflationary periods.

In summary, "printing money" can never create real wealth – it simply redistributes value, often from savers to borrowers or from the general public to the government.  

The United States' exit from the gold standard marked a major shift in monetary policy with lasting effects on inflation and the value of the dollar. Under the Bretton Woods system after World War II, the U.S. dollar was pegged to gold at $35 per ounce, and other major currencies were pegged to the dollar. This meant foreign governments could redeem their dollar reserves for U.S. gold. By the late 1960s, rising U.S. deficits and inflation weakened confidence in the dollar, triggering a rush by foreign governments to exchange dollars for gold.

In August 1971, President Nixon ended gold convertibility, effectively dismantling Bretton Woods. This "Nixon Shock" was prompted by pressure on U.S. gold reserves and unsustainable inflation. The dollar became a fiat currency, no longer backed by a physical asset. Without the gold constraint, the U.S. could expand the money supply more freely. Inflation surged, peaking above 14% by 1980, and the dollar weakened both in global markets and in terms of purchasing power. Gold’s price reflected this loss of confidence. From about $40 in 1971, gold rose to $180 by 1974 and peaked at $850 in 1980. This increase mirrored inflation fears and the shift away from gold-backed currency. After monetary tightening in the 1980s, inflation fell and gold prices stabilized, but the transition to fiat money left a lasting impact.

For investors, the end of the gold standard removed a key limit on money creation. Since 1971, the U.S. money supply and public debt have grown substantially, while the dollar has lost roughly 98% of its purchasing power. In contrast, gold has risen dramatically in value, highlighting its role as a long-term inflation hedge. Though fiat currency allows for economic flexibility, many view the loss of gold backing as the moment inflation risks became structurally embedded in the system.

Gold has a long track record of preserving value during inflation and economic uncertainty. Unlike paper currency, gold can't be printed, and its supply grows slowly. This scarcity, combined with global trust, makes gold a reliable hedge against declining fiat currencies. History shows that gold typically rises during inflation. In the 1970s, as inflation soared, gold climbed from $35 to over $800 per ounce. It surged again in the 2000s, peaking at $1,900 in 2011. After the COVID-19 crisis, gold surpassed $2,000 and reached a record ~$2,135 in 2023. By 2025, it topped $3,000.

Gold tends to gain value when confidence in fiat currencies falls. Inflation, money printing, and low real interest rates all make gold more appealing. While short-term prices can be volatile, gold has maintained purchasing power over centuries. One ounce could buy a fine toga in ancient Rome—and a quality suit today. Gold also diversifies portfolios. It often moves independently from stocks and bonds, helping balance risk. Many advisors recommend physical gold like bullion or coins for tangible protection against inflation and financial instability. These forms carry no counterparty risk and remain trusted globally.

In summary, gold is more than a commodity—it's a form of financial insurance. Its value can fluctuate, but it has never become worthless. For investors worried about inflation, gold remains a proven, time-tested store of wealth.

Want to learn how to incorporate gold into your long-term financial strategy? Download our FREE U.S. Gold Bureau Investor Guide today and take the first step toward protecting your wealth with precious metals.