It is no secret that inflation poses significant challenges for visitors in Colombia. While the country’s inflation rate of slightly over 10% per year may not be deemed as alarming when compared to historical cases of hyperinflation, its long-term repercussions cannot be ignored.
A striking example of the impact of inflation can be seen in the exchange rate between the Colombian peso and the U.S. dollar. In 1960, it took merely six Colombian pesos to acquire one U.S. dollar. However, presently, the exchange rate stands at a staggering 4,000 pesos for a single dollar.
The question arises: How can one protect themselves from such extreme inflation? To shed light on this matter, let us refer to the accompanying chart that offers valuable insights. The chart illustrates the Colombian consumer price index since 1993, alongside gold and the Colombian stock market denoted in pesos. Regrettably, data for previous years was unavailable.
Interestingly, it is often observed that gold tends to exhibit poor performance in inflation-adjusted terms during periods of hyperinflation.
Nonetheless, the overarching message conveyed by the chart is hopeful – there are assets available that can help preserve one’s purchasing power amidst high inflation. In addition to this observation, I would like to highlight a few more insights gleaned from the data.
Gold’s Performance During Hyperinflation
Research by Claude Erb, a former commodities portfolio manager at TCW Group, and Campbell Harvey, a Duke University finance professor, indicates that gold tends to perform poorly in inflation-adjusted terms during periods of hyperinflation. Gold’s real price dropped by 70% during Brazil’s hyperinflation in the 1980s and 1990s.
Stocks Outperforming Gold in Colombia
Over the past 30 years, both the Colombian stock market and gold have outperformed Colombian inflation. However, stocks have been the better performer of the two. This aligns with findings from market historians who have observed similar trends in other countries over the long term.
Neither Stocks nor Gold Provide Reliable Inflation Hedge in Short-term
During the first decade of the three-decade period examined in the chart, both stocks and gold failed to keep up with Colombian inflation. This supports the historical conclusion that none of the major asset classes can reliably hedge against inflation in the short term. Investors seeking assets that closely correlate with short-term inflation fluctuations may consider inflation-protected government bonds.
Gold Overvalued in Colombian Pesos
According to researchers who have observed mean-reversion in the gold-to-inflation ratio, gold in Colombian pesos is currently overvalued. The current ratio is double the longer-term average, suggesting that gold may be poised to underperform. This contrasts with the situation in the 1990s when the ratio was half of the long-term average, and gold went on to significantly outperform inflation over the subsequent two decades. The same applies to U.S. dollar-based investors in gold.
Housing Overvalued in Majority of U.S., Reports Fitch
According to ratings agency Fitch, the housing market in the United States is currently overvalued in a staggering 88% of the country. This concerning statistic sheds light on the precarious state of the real estate industry.
Fitch’s assessment serves as a wake-up call for both potential homebuyers and industry professionals. It indicates that caution must be exercised when considering property investments, as inflated prices could lead to financial hardships down the line.
The report comes amidst growing concerns about the stability of the housing market. With such a high percentage of overvalued properties, the risks of a market correction or even a potential bubble burst become increasingly apparent. It is crucial for individuals and the industry as a whole to remain vigilant and adopt prudent strategies.
While fluctuations in housing prices are not uncommon, the prevalence of overvaluation across such a vast portion of the country underscores the urgency for action. Effective measures should be implemented to curb this phenomenon and establish a more balanced and sustainable real estate market.
Additional Reading: The Inflation Challenge of 2024