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Is Gold Investing Really an Inflation Hedge?

12 Views· 04/18/22
Wise Phenomenal
Wise Phenomenal
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Is Gold Investing actually a good strategy during times of inflation? Could we see $30,000 per oz or will the government just seize everyone's gold? (again)

The price of gold in Venezuela today, a country decimated by hyperinflation, is over 400 trillion Bolivars per oz. If you flew to Venezuela today with a single 1 oz gold coin you can become a Venezuelan trillionaire by morning.

The point being that measuring gold against paper currency is a moot point, especially during hyperinflation. If bread is $1000 does it really matter if gold is $30,000.

Looking at it that way of course gold could reach $5,000, $10,000, $50,000 per oz but it would likely do so as a result of inflation. If we ever experienced hyperinflation, which is a highly unlikely but a possible scenario, gold could reach 1 million dollars. But dollars would not be worth much. There is a popular saying 1 oz of gold regardless of the surrounding value of currency, can always buy you a nice suit based on the value of money at the time.

But what about during inflation? Most people hear talking heads promote how gold investing is a great hedge against "inflation" and just accept it as gospel. This is a sophomoric view of inflation and of gold. Let me ask you this, Will sandbags protect you against a flood? That questions is impossible to answer without context, and you need more data. Will gold protect you against inflation? You need more data.

In reality gold has not been a great hedge for low, stable inflation. 1973 to 1979 annual inflation averaged around 8.8%, at times into double digits. Gold was a decent hedge and returned around 35%. But 1980 to 1984, annual inflation around 6.5%, gold investors lost 10% on average, and 1988 to 1991 inflation at 4.6% gold saw a negative 4.6% return. So gold is not always a good inflation hedge.

Where gold really shines is in times of very high and accelerating inflation, which we may be seeing in the future. This is something many people don't understand. Another popular misperceptions is that currency debasement, or money printing, quantitative easing does not in and of itself destroy currencies and lead to hyperinflation. We are 30 trillion in debt, much more if you count obligations, and the dollar is still strong. What destroys currency is when peoples confidence in it falters. At that point it is all over and people will likely flock to gold.

The argument for the dollar is that the USA is the most powerful nation, and the US dollar is the worlds reserve currency. But already we see Putin and other countries trying to chip away at that, even considering accepting Bitcoin or gold for oil. Russia has already pegged the Ruble back to gold, which hasn't been done by any country since the 70's. This could be bullish for both Bitcoin and gold.

We have the perception that currency in our hand is valuable but the actual value of paper currency is paper. Not that long ago currency represented a certain amount of gold holdings. There has been some discussion of pinning the dollar back to something like gold, and today, if we were to bring money back to the gold standard an oz of gold would immediately be worth $30k an oz. That gives you some idea of the loss of value of the dollar since it started back at $35 oz.

So it is prudent to hold some gold in the event of financial cataclysm - we live in crazy times. And bitcoin, we see people fleeing Ukraine with usb discs, and commerce in Venezuelan hyperinflation involved a huge amount of crypto. Its not an either Gold or Bitcoin. And think if governments start transacting oil in crypto, where is that price going to go?

One problem with gold that many do not consider is that governments have frequently confiscated it. 1933 in the USA gold was illegal to own, right up to 1975! 1959 to 1976 the Australian government made it legal to seize gold from its citizens and exchange it for paper money. 1966 Britain banned citizens from owning more than 4 gold coins, that law lasted until 1979. In 1935 Benito Mussolini had a bad recession on his hands and asked citizens to donate their gold jewelry in exchange for a cool steel bracelet that said translated from Italian "Gold for the fatherland" Women were so filled with patriotic fervor many gave away their wedding rings and Mussolini took in 35 tonnes of gold. If you wonder how so many people could be deceived by a fascist dictator, at the time, it seems like the right thing to do, just like today.

Can it happen again? Make no mistake if the government perceives a significant threat to their currency they will absolutely seize your gold. And will use propaganda to make it appear you are unpatriotic if you do not volunteer the gold yourself.

So is gold investing good in times of inflation? It depends.... firstly on how bad inflation gets, and secondly how desperate the government becomes.

Has silver investing been a good hedge in recessions?https://youtu.be/7q2pI3LV3vw

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