Gold and Inflation

It’s interesting that when I state a fact that gold is not an inflation hedge I get so much flak. This just shows you how close-minded a lot of people are and why it is easier than you think to make money investing if you are objective. I don”t understand why I must believe gold is an inflation hedge to be bullish on gold. Yes gold will probably rise along with inflation in this cycle, but that by no means proves it’s an inflation hedge.

Over time, gold can match the growth in the money supply. I don’t dispute that.  But I can say the same thing for almost every asset in the world. It’s like that old adage that a broken clock is right 2 times a day. For 20 years, gold goes the opposite direction of the money supply, then it rises faster than the money supply. For a very short period of time, gold will more or less track the money supply. But so what? How can an asset go the opposite direction of inflation for 20 years and be considered an inflation hedge?

Is Gold Money?

The gold as an inflation hedge debate can be ended pretty quickly when you consider whether or not gold is money. If gold is not money, then it will tend to rise with inflation because the purchasing value of whatever is money at the time (usually fiat currency), declines relative to the price of assets. Simple enough. But if gold is money, then the opposite happens. Gold, being money, by definition loses value with inflation. So gold is not some asset given to us from above for the sole purpose of tracking inflation. Gold is an asset that has always been a hedge against government mismanagement.

In order to protect your assets in the years ahead, you will have to let go of your preconceived notions and try to be as objective as possible. A lot of the things that I plan to do as an investor in the years ahead will not make sense. For example, everyone knows I am bearish on the economy because of our debt situation. But this doesn’t mean I can’t invest in real estate in certain distressed markets. Some markets will rise while others fall. It’s just like when gold stocks rose from November 2008 to March 2009 while the general market entered the abyss. You have the general trend of an asset class as a whole, then you have distinctions within the asset class. Real estate in general is in a lot of trouble for a long time. But certain markets are screaming buys; others are still screaming sells.

The mistakes I make as an investor because my analysis was wrong don’t bother me too much, but the mistakes I make because I’m stubborn do. I think gold is going much higher, but I don’t have a special allegiance to it. Hopefully I will be able to sell when the time is right without being overly committed to gold for sentimental reasons. Sooner or later, the gold bears will be right- but not yet. It is debt that is important with gold, not inflation.