Again, to reiterate, these periods are not defined by high absolute inflation rates.  Instead they are characterized by sizable increases in the rate of inflation.  It is during these periods that investor expectations for future inflation skyrocketed.  Nevertheless, observe just how different one period can be from the next:

Consider the sixth period spanning 2/29/1932 through 7/31/1935.  For the 18 months just prior to the initiation of this sixth episode, consumer prices had changed by -14.55% (i.e., they had fallen by 14.55%).  However, by the end of this sixth episode, the most recent 18 months had experienced an increase in the price level of +3.79%.  From beginning to end, the rate of inflation had realized an absolute increase of +18.34% (i.e., 18.34%   =   3.79%   minus   -14.55%).

Consider the first period spanning 12/31/1977 through 9/30/1980.  For the 18 months just prior to the initiation of this first episode, consumer prices had increased by 20.34%.  However, by the end of this first episode, the most recent 18 months had experienced a far more modest increase of only 9.33%.  From beginning to end, the rate of inflation had experienced an absolute increase of +11.01% (i.e., 11.01%   =   20.34%   minus   9.33%).

Collectively, these eleven episodes of significant increase in the rate of inflation (large positive second derivative of the price level) comprised 30.25 years from out of the last 114.62 years (12/31/1896 – 6/1/2013).  In other words, our economy experienced problematic increases in the rate of inflation 26% of the time.  It was during these 30+ years that commodities and precious metals performed unusually well.  Just how well, is the subject of the next section.


III.   Simulations And Results

The following table provides the summary statistics for each of the eight asset categories evaluated in this article.  These results are restricted to the specific 30.25 years identified above and reveal what happens when the rate of inflation shifts upward.



The last three columns, of this table, provide the summary statistics for spot gold bullion, spot silver bullion, and for diversified commodities as represented by the CRB total return index.  Consider the last column (diversified commodities).  During the eleven episodes characterized by major increases in the level of inflation, the CRB Index returned an average annual geometric return of 15.3% with an annualized standard deviation of 9.5%.  Moreover, these returns were positive in 82% of the intervals (nine of the eleven intervals) and were greater than the rate of inflation, delivering a positive real return 91% of the time (ten of the eleven intervals).  Clearly, commodities and precious metals deliver surprising robust and attractive return patterns during periods of significant inflation increases.


IV.   Conclusions

If the Federal Reserve loses control over the financial economy (as opposed to the real goods and services economy) and is unable to prevent the rapid monetization of the history-making level of private bank reserves (reserve balances held by banks at the Fed) and the associated increase in the velocity of money, then we are likely to experience a twelfth episode of increased inflation levels.  During such a period, commodities and precious metals can be expected to perform well.