Inflation, FIAT Devaluation, and Gold: Nominal vs. Real Returns

Understanding inflation and its impact on fiat currencies and investment returns is crucial for making informed financial decisions. This post explores the relationship between inflation, fiat currency devaluation, and gold as a store of value, with a focus on the important distinction between nominal and real returns.

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, resulting in a decrease in purchasing power. When inflation occurs, each unit of currency buys fewer goods and services than it did previously.

This chart illustrates how the purchasing power of $1 has declined over time due to inflation. What cost $1 in 1950 would cost approximately $11.11 today, meaning the dollar has lost over 90% of its purchasing power in 75 years.

The Devaluation of Major Fiat Currencies

Fiat currencies, which are government-issued currencies not backed by physical commodities like gold, have consistently lost value over time. Let’s compare the purchasing power loss of major global currencies since 1970:

No major fiat currency has maintained its purchasing power over time. Even the Swiss Franc, often considered one of the most stable currencies, has lost over 80% of its value since 1970.

Annual Inflation Rates

Inflation rates fluctuate over time, influenced by economic policies, global events, and monetary supply changes. Here’s a visualization of US annual inflation rates since 1970:

Notice the periods of high inflation in the 1970s and early 1980s, as well as the recent inflation spike in 2022. These periods can significantly erode purchasing power and impact investment returns.

Gold: Nominal vs. Real Returns

Gold has been considered a hedge against inflation and currency devaluation for centuries. However, to properly evaluate gold’s performance, we must distinguish between nominal returns (the simple price change in currency terms) and real returns (returns adjusted for inflation).

This chart reveals several important insights:

1. Gold’s price in nominal terms has increased significantly from $35/oz in 1970 to around $2,320/oz in 2025
2. When adjusted for inflation, gold’s “real” value has been much more volatile
3. Gold experienced a major peak in 1980 that, in inflation-adjusted terms, wasn’t surpassed until recent years
4. Despite long periods of stagnation, gold has generally maintained its purchasing power over the very long term

The Gold/Fiat Ratio

To better understand gold’s performance against fiat currencies, let’s examine how many ounces of gold you could buy with fixed amounts of different currencies:

This chart shows how many times less gold you can buy today with the same fixed amount of currency compared to 1970. For example, $10,000 USD in 2025 buys only about 6% of the gold that the same nominal amount could purchase in 1970.

Nominal vs. Real: Why It Matters

Understanding the difference between nominal and real returns is critical for investors:

The contrast is striking:

• Bank Savings: While showing a nominal gain of 68% over 30 years, they actually lost 43% in real purchasing power
• Government Bonds: Barely beat inflation with a real return of 8%
• Gold: Delivered a substantial real return of 201% over the period
• S&P 500: Provided the highest real returns at 412%

Key Takeaways

1. Inflation erodes purchasing power: What seems like growth in nominal terms can actually be a loss in real terms
2. All major fiat currencies have lost significant value: Over 80% purchasing power loss since 1970
3. Gold’s nominal price has increased significantly: From $35/oz in 1970 to over $2,300/oz in 2025
4. Gold has maintained purchasing power: While not always keeping pace with inflation in the short term, gold has preserved wealth over very long periods
5. Real returns matter more than nominal returns: Always adjust investment performance for inflation to understand true value changes

Understanding these concepts is essential for building wealth that maintains its purchasing power over time and for developing strategies to protect against the inevitable devaluation of fiat currencies.