Is Gold Really An Inflation Hedge?

Look on any mainstream investing newsletter or any economic market guide and they’ll most probably tell you that Gold is a hedge or insurance against inflation. But is that true?

This fascinating article by Mish on his blog intriguingly attempts, once again, to disprove the conventional logic. I have been contemplating this concept for some time and it’s a pleasure to find most of my research done. In addition, I have been questioning how well gold does in times of deflation. Apparently, very well.

Here are his final thoughts:

Gold in many time frames is not much of an inflation hedge.
In terms of real price, gold is a better deflation hedge than an inflation hedge. The reasons…

1. Gold is money. Proof of that statement can be found in the market behavior of gold. The markets treat gold as if it was money (not only now but on a historical basis). On that basis gold must be considered money regardless what the central banks say.

2. Money is worth more in terms of other goods and services during periods of deflation. During periods of disinflation “cash is trash” and that helps explain why gold dropped from over 800 to 250 even though we had a positive (although falling) rate of inflation for much of that time frame.

3. Gold is stateless and has no liabilities attached to it. It is the only money that won’t be touched by whatever measures the authorities decide to take to combat deflation.

In addition to being a deflation hedge, gold may also play a role in a panic flight to safety scenario. For example: If the US dollar were to suddenly collapse and/or if fiat currencies were totally repudiated in general, gold would be a huge beneficiary.

Given the current underlying conditions, with increasing chances of a deflationary credit implosion related to housing, along with some chances of a collapse in the dollar, Yen, or fiat currencies in general, the incentive to store wealth in the form of gold is massive.

Full Article

Mish also points out that Silver not only shares the “accumulation” qualities inherent in money, but in addition is an “industrial” commodity as well. Thus, diminishing its above ground supplies, increasing its scarcity, and hence its value.

We have in the past posted a number of articles emphasizing the possibilities of silver competing or even replacing gold as the primary medium of monetary value.

Over the past 22 years, while M3 – the primary adviser of total dollars in circulation – has been rising continuously while gold as an asset has fallen.

Is Gold An Inflation Hedge?
Mike Shedlock
February 20, 2007


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