E $4K Gold - Insurance, A Hedge, An Investment

After decades of concerted effort by governments and central banks, the focus away from gold as money has led to its characterization as an investment, a hedge, insurance, etc. Some still refer to it as a barbarous relic. Are any of these descriptions valid?

GOLD AS INSURANCE

There is a seemingly plausible argument for calling gold a hedge or insurance given volatile conditions in our society today. But the logic leading to those classifications ignores the single factor that affects the price of gold. That single factor is the actual loss in purchasing power of the paper money substitute in which gold is priced.

Historic instances of extreme civil unrest, political instability and insurrection are most times associated with amplified concerns regarding the local fiat currency. A higher price for gold is a reflection of the  cumulative deterioration of the currency in which it is priced.  

It is especially important to remember this today. If you wake up some morning this fall and find that gold is priced at $4000 oz., it can only happen after the US dollar has lost additional purchasing power of fifty percent.

In other words, by the time gold is at $4000 oz., it will cost you twice as much for everything you need. You will need $100,000 per year to pay for what costs you $50,000 per year now. 

This does not mean that further increases in the supply of money and credit are guarantees that the dollar will collapse or that its purchasing power will disappear overnight. (see Gold Price Is Not Correlated To Money Supply)

GOLD AS A HEDGE

As far as being a "hedge against inflation", some clarification is in order.

  1. Inflation is the debasement of money by government.
  2. All governments (and central banks) inflate and destroy their own currencies.

What most people mean by the term 'inflation' are really the effects of inflation. Those effects are volatile and unpredictable. (People expected hyperinflation in the late 1970s and early 1980s. It didn't happen. They expected it again after 2011. It didn't happen. Similar expectations are voiced daily about the prospects for hyperinflation now. It is less likely now than before.)

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William K. 2 weeks ago Member's comment

Thisis probably the most sensible article I have seen in the past year or more. A totally rational explanation of the value and benefits of gold.

Thanks for the writing!!!