E Is Gold An Economic Accelerator?

Gold can have multiple personalities. Sometimes it can act like a hedge against inflation. Sometimes it can act like a safe haven asset. But its most important attribute is something that most people don’t even tend to think about. Sometimes it can act like a barometer of economic success. Sometimes the price of gold can be considered an “economic stimulus gauge”.

Gold Can Have Multiple Personalities

The first part of understanding gold is to realize that it can have multiple personalities and can switch between them at a moment’s notice. The second part is to recognize the personality of the moment and deal with it independently.

Arguably, the most important attribute of gold is that it is not reproducible. You can’t duplicate it and you can’t print more of it. Although there are a number of gold mines on the world, they add very little incremental gold to the system every year. For all intents and purposes the amount of gold we have now is the same as we will have one hundred years from now. Unlike printed money, if work is performed in return for one ounce of gold, it will retain its value whether you are paid in one, ten or one hundred years. The good news is that gold tends to retain its value. The bad news is that it doesn’t earn interest. Therefore, most of the time gold can behave like any other asset that does not earn a return. It can behave like land.

Most of the time, gold can be thought of  like land on the outskirts of a city. At a very general level, the value of land would increase if the city was expanding and people would agree to pay more for that land in the future. Likewise its value would decrease if the city was shrinking, and people would pay less. However, interest rates can have a very big impact on the future price of this land. If the land was expected to go up by four percent per year (inflation) and interest rates were three percent, would you buy it? Yes, because you could borrow the money for less than the return. The “real interest rate” to you the buyer would be negative. It would be minus one. If interest rates were five percent, would you buy the same piece of land? No because the real interest rate to you would be positive. It would be plus one. The difference between the return on the asset and the interest rate is called the “real interest rate”. Therefore, most of the time, assets like land and gold  go up if the real interest rate is negative (accelerant) and it goes down if real interest rates are positive (brakes)

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Linda Willis 2 months ago Member's comment

Good article. How do you feel about #gold with everything that's been going lately?

Mike Verge 2 months ago Author's comment

Hi Linda,

Since the amount of gold in the world is essentially fixed, the more money they print, the less each dollar is worth versus gold. So each dollar is being devalued versus gold.

Gold will stop going up when the central bank stops printing money and devaluing the dollar.

I don't see that happening soon. Do you?

Thanks for the feedback.

Mike

Linda Willis 2 months ago Member's comment

No I don't either. If anything I think #gold is an excellent safe haven during all times of uncertainty, including right now.