Beyond the Numbers: The Real Value of Assets in an Inflationary World

If an asset is worth 100 TL today, will it have the same purchasing power 10 years from now? In economies with persistent inflation, nominal prices alone are far from reflecting an asset's true value. Adjusting for inflation is a critical method used to understand how much an asset's price has increased beyond the rise in the general price level (i.e., inflation).

Simply put, inflation is the loss of a currency's purchasing power over time. When the price of a product rises, part of that increase comes from the product's own value appreciation, while another part is due to the currency's depreciation. Adjusting asset prices for inflation allows us to separate these two effects. This way, we can calculate an investment's real return.

This adjustment is typically made using widely used inflation measures like the Consumer Price Index (CPI). An asset's nominal price is adjusted according to a specific year's CPI, and then expressed in the currency of the base year. This process "translates" historical price data into today's currency, allowing for more meaningful comparisons.

Precious Metals: Their Real, Inflation-Adjusted Performance

Precious metals such as gold, silver, and platinum have historically been seen as a "hedge" against inflation. This perception is rooted in the tendency for people to shift their wealth towards tangible and finite resources during periods when currency loses value. However, to understand the accuracy of this assumption, it is crucial to adjust precious metal prices for inflation.

Gold and Silver: True Performance Against Inflation

Gold is often regarded as the most popular inflation hedge. However, not every period of nominal price increase for gold means it has outpaced inflation. For instance, during the high-inflation era of the 1970s, gold prices soared nominally. Yet, when we adjust these prices for inflation, we see that the peak price could fall behind for a long period in subsequent years.

Similarly, due to its industrial use, silver is more volatile than gold. When inflation-adjusted silver prices are examined, it is observed that part of the nominal price increase is solely due to the general price rise, and silver's real value experiences periodic ups and downs.

These analyses show that precious metals are not an automatic shield against inflationary pressures but have the potential to preserve purchasing power in the long term.

Why Do Precious Metals Appreciate?

The prices of precious metals are not only affected by inflation. Factors such as geopolitical instability, declining confidence in currencies, central bank policies, and industrial demand also determine their prices. When inflation is high, investors seek a safe haven amid uncertainty, which increases the demand for precious metals. However, this demand is often related to market psychology and flight-to-safety tendencies rather than an increase in the asset's intrinsic value.

In conclusion, to truly understand an asset's performance and its role in your investment portfolio, it's essential to look beyond nominal prices and adjust them for inflation. While precious metals may offer some protection against inflation, it is important to remember that this protection is not full or guaranteed, and prices are influenced by many different dynamics. Therefore, when investing in precious metals, examining historical inflation-adjusted price trends rather than focusing solely on nominal price increases will help you make a healthier investment decision.

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Important Note

The gold-silver ratio should not be used as a standalone buy or sell signal. When analyzing the market, this ratio should be evaluated alongside other economic data (interest rates, inflation, geopolitical developments) and technical analysis indicators. It is important to remember that past data does not guarantee future performance. However, understanding this ratio will help you gain a deeper insight into the dynamics of the precious metals markets.