Many investors fear that today’s artificially low interest rates and high government budget deficits will spur a huge rise in inflation.

These fears are prompting many investors to devote more of their money to investing in gold and gold investments, because they believe gold will provide them with additional security. That helps explain why the price of gold has risen more than 50% since the fall of 2008.

We agree that a huge burst of inflation is a possibility in the next few years. But it’s a mistake to assume that vastly higher inflation is a certainty, as many who are investing in gold do today.

This is not the first time hyperinflation fears have pushed up interest in investing in gold

In the late 1970s, gold enthusiasts were equally certain that a move toward hyperinflation was a sure thing. They became even more certain in the early 1980s, after newly elected President Ronald Reagan cut taxes, initially expanding the budget deficit. But instead of rising, inflation came down. In fact, the rate of inflation worked its way downward for decades. This was due to a number of factors, particularly the jump in interest rates under U.S. Federal Reserve chairman Paul Volcker.

Gold enthusiasts feel that can’t happen again. They feel, and rightly so, that a steep rise in interest rates is out of the question today because it would bankrupt too many borrowers, including the U.S. government. Of course, history never quite repeats itself. But other developments could head off the widely predicted inflationary surge.

Divided government could hold back spending

For one, Republican victories in the recent mid-term Congressional elections could hold back U.S. federal spending. Having a divided government (a president from one party and significant Congressional opposition from the other) can lead to a high degree of prosperity and sensible government. That’s what happened in the 1990s, with Bill Clinton in the White House while the Republicans controlled the U.S. Senate and House of Representatives.

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Investing in gold: Cheap oil would put the brakes on inflation

Another mistake that today’s pessimists make is to assume that oil will soar in the coming decade, as it did in the last one. They believe this alone guarantees higher inflation. But this kind of belief carries the seed of its own undoing. It leads many consumers and businesses to focus on energy conservation in their cars and buildings.

Then too, natural gas supplies have ballooned in the past few years, mainly due to advances in shale gas extraction and other forms of unconventional natural gas. This guarantees large, dependable supplies of low-priced natural gas for decades to come. This will lead many businesses and governments to switch from gasoline to natural gas in their car and truck fleets, purely to save money. If this switch to natural gas undermines oil use and keeps oil prices sluggish, it will tend to hold down costs throughout the economy. In addition to being a key fuel, oil is a major raw material in many industries.

Sluggish oil prices would act like an across-the-board tax cut

Cheaper oil would leave business and consumers with higher profits, better cash flow and more money to spend. It would be an unquestionable economic stimulant. It would naturally expand tax collections. This will bring an automatic drop in budget deficits, if governments resist the urge to raise taxes.

Vastly higher inflation seemed like a sure thing to 1970s and 1980s gold enthusiasts, but things didn’t turn out that way. Something like that could happen again in the 2010s, for completely different reasons.

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