Is Gold an Inflation Hedge?

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JAG's picture
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Joined: Oct 26 2008
Posts: 2492
Is Gold an Inflation Hedge?

 I came across an older post by Mish titled Is Gold an Inflation Hedge? (hat tip to Chris Kresser) that might be of some interest to some in this community.


Final Thoughts

Gold in many timeframes 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 timeframe.
  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.

KKPSTEIN's picture
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Joined: Oct 20 2008
Posts: 120
Re: Is Gold an Inflation Hedge?


This is very well stated. Thanks Jeff and Mish.

I would also add: 

Gold and silver are the only REAL money; everything else is a promise to pay it.

Gold and silver alone have stored the wealth and fruits of a past people's physical and mental labours and efforts and passed it down to others. At the same time, this same gold has provided stable value and steady purchasing power to its owners over time.

At other points in history, gold alone has saved families and individuals from imminent danger, death and even starvation, faithfully serving as the money of last resort.

Gold has been the standard used to measure a currency unit of value for thousands of years because:
Gold is liquid and easily traded, with a narrow spread between the prices to buy and sell (about 1-2%).
Gold is easily transportable, because it has a high value for its weight.
Gold is money because it is divisible; you can divide it into coins, or re-melt it into bars, without destroying it.
Also, gold is interchangeable. It can be substituted for another piece of gold with no hassle.
Gold is also nearly impossible to counterfeit, as genuine gold is easily recognizable.
When measured by weight, gold is easily countable, and verifiable.
Gold is money because it is a great store of value. It is not subject to decay, rot, or rust.
Gold has an intrinsic value, because it is rare, highly desired by the world over.
Gold is no one’s liability.
Gold depends on no one’s promise to pay.
Gold carries no credit risk.
Gold cannot be inflated (you can’t print more of it).
Gold’s value cannot be altered by government decree.


lukang's picture
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Joined: Jul 2 2009
Posts: 3
Re: Is Gold an Inflation Hedge?

Thanks for the post referral JAG.  That's a new idea I've not heard of before, that gold will perform in deflation due to its role as money. Makes sense on a certain level, although gold also is a commodity.  The question seems to be at what points in time will gold be treated by investors more as money or more as a commodity.  I find it hard to believe that in a deflation, where cash is scarce, that people would find any need for a substitute for currency to purchase goods.  Therefore, I wonder if in a deflation, gold acts more like a commodity b/c the main thrust of demand is for cash.  I'll have to mull this one over.

passantgardant's picture
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Joined: Apr 13 2011
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How to Value Gold or Silver as an Inflation Hedge

You can quantitatively value gold as an inflation hedge using actuarial methods such as insurance companies use to value premiums according to assessed risks. You can use the following online calculator to come up with a fair value of gold based on your own inflation expectations:

Likewise with silver:

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