No. of Recommendations: 4
"I don't own any gold nave never considered purchasing any. However, I am curious to learn why some people consider gold a "hedge against inflation."


Currently, every major currency in the world is a fiat currency. The last holdout was the US who went off of the gold standard in 1972. Without the pesky need to hold gold or other PMs to back your currency, governments are free to print as much money as they want. This increase in the money supply is inflation - the rising prices you pay at the store are just the result of this inflation. Since 1940 the US dollar has lost approximately 90% of its value (purchasing power) due to inflation (running 3-4% per year).

However, if you look at the purchasing power of gold it has held up remarkably well. A favorite example of mine is the following...In Roman times a one ounce gold coin would buy a new toga, a leather belt, and pair of sandals. Today that one ounce coin could buy you a new suit, leather belt, and pair of shoes. For two thousands years the purchasing power of gold has been fairly constant. Thus it is a store of value against the declining purchasing power of all fiat curriences.

Someone mentioned the gold inflation following Spain's conquest of the New World. That was a very unique situation that is unlikely to repeat itself unless alchemists finally succeed in turning lead into gold or we conquer the lost continent of Atlantis and seize their gold. The other argument that people make against gold as an "investment" is that over long periods of time it tends to lag the stock market. While true, that only works if you are planning to have 100% of your assets in equities. Certainly even the most aggressive of investors would recommend having a small portion of ones wealth in cash or bonds. Currently, inflation is running around 4-5% (if you believe the government's numbers), so cash is losing 4-5% of its purchasing power each year. Ten year US treasuries are only yielding about 3.7% - considering inflation that is still a negative rate of return.

Gold, unlike paper money, cannot be created at will. It takes a substantial investment of time and labor to produce it. Thus it cannot easily be debased by simply creating more. As such, it is a store of value and a hedge against inflation. If someone offered you an ounce of gold or $940 to stash under your matress for the next 50 years which would you choose?

KB
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