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Posted On Wednesday, Nov 04, 2009
A lot has been talked about the unprecedented money supply growth and its eventual translation to inflation. In History, there have been episodes of currency crises in different parts of the globe on account of run away increase in money supply resulting from printing more money. A few of the occurrences turned really worse and were identified as era of "hyperinflation". To recall a few, Zimbabwe experienced hyperinflation for much of this decade and not to forget the well-known Germany’s Weimar Republic hyperinflationary period in the 1920s.
Month with highest inflation rate
Highest monthly inflation rate
Equivalent daily inflation rate
Time required for prices to double
|Hungary||July 1946||1.30 x 1016%||195%||15.6 hours|
|Yugoslavia||January 1994||313,000,000%||64.6%||1.4 days|
|Germany||October 1923||29,500%||20.9%||3.7 days|
|Greece||November 1944||11,300%||17.1%||4.5 days|
|China||May 1949||4,210%||13.4%||5.6 days|
Hyperinflation is just inflation at an extremely high rate. Usually this also means the inflation is out of control and its level is not precisely predictable.
There is no precedent for the current world money order. The magnitude of increase in money supply has been much higher this time around. However, history provides us some insights to how worse can it get.
When it comes to Hyperinflation, Germany’s Weimar Republic era of 1921-23 serves as perhaps the best documented cases in modern history. While there is a lot of information in the public domain, this was recently described in a recent article by Peter Krauth. Many are unaware of the dire consequences of hyperinflation; a glimpse at what happened in Germany can be hair-raising.
During the World War I in 1914, Germany opted to finance the war by borrowing rather than increasing taxes. The German policy makers chose borrowing because they expected to win the war and intended to force the losers to pay for the cost of the war. It was thus logical to the policy makers to use borrowing rather than taxation.
But Germany lost the war and the victors imposed heavy reparation payments upon her. The reparation payments were perceived as unfair in Germany and the social democratic government was reluctant to impose the burden of their payment upon the German population.
The government, strapped for funds, resorted to printing money. The value of the mark relative to other currencies fell thereby increasing the cost of imported goods. Prices rose increasing the cost of running the government. This necessitated the printing of even more money. Prices rose further and the exchange rates for the mark dropped even more. The result was hyperinflation.
At first, Germans reacted to the higher prices by economizing and reducing their consumption. But when they realized that it was not just a matter of some things being more expensive but instead that the mark was losing value they reacted by spending their marks as fast as possible. This meant that there was little constraint on prices.
There were winners as well as losers in this hyperinflation. Those on fixed incomes and who were owed a specific amount of money found that the real value of their holdings reduced to zero. But those who owed money found their debt effectively wiped out.
The German mark devalued significantly in terms of gold prices. The paper mark/gold mark ratio went from a one-to-one ratio in 1921, all the way to a one-to-1.0 trillion ratio in 1923.
Just imagine what would happen to gold in any remotely comparable situation involving the U.S. Dollar. The dollar acts as a world reserve currency. There has been an unprecedented and explosive growth in money supply. The dollars are being created just by printing more of them without any asset backing it. They are nothing more than pieces of paper with black ink.
The U.S has been accumulating deficits over years. The deficit is likely to increase over $2 trillion; worrying its creditors. The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less.
As seen in the above example on Germany, currencies lost value as their quantity of the money in system increased considerably. In that case, it will take a lot more dollars today to buy the same thing one bought with fewer dollars earlier.
There have been evidences of currency losing their entire value creating a hyper inflationary scenario. Like in Zimbabwe, people carried sacks full of notes to pay for their daily purchases. Also, during the Weimar mark inflation, people pushed wheelbarrows full of German marks to the bakery just to purchase a loaf of bread.
A currency meltdown occurs when governments face overwhelming gaps between revenues and expenditures; foreign investors abandon the currencies as they race for the exit, leaving a trail of worthless paper.
A decline in the value of dollar will affect the entire global economy. The US dollar acts as the world reserve currency and most of the world trade happens through exchange of dollar currency. China with USD 2 trillion* of US Dollar notes will be the worst affected. That is why the Chinese government is buying hard assets - including gold.
Gold is the only time-tested currency that can act as a store of value during times of hyperinflation. Are we certain that the US dollar will collapse? Nothing is definite, and neither do we know when such an event could occur. But better to buy your "insurance" - in the form of owning gold.
We recommend that you allocate at least 10-20% of your investments to gold and insure your wealth from being eroded from a possible inflationary threat.
The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.
Investment Objective: Quantum Gold Fund`s (QGF) investment objective is to generate returns that are in line with the performance of gold, subject to tracking errors. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: QGF is an open-ended Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: Nil Exit Load: In case of QGF: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: QGF is the first gold scheme being launched by the AMC. The AMC has no previous experience in managing gold scheme. The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to marker risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com
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