I hear so much chatter about the owning of gold as an inflation hedge. Certainly, if you look at gold over very extended periods of time (say 50-100 years), gold tends to maintain (or even increase) its buying power over time whereas fiat currencies inevitably devalue through inflation. But, if examined on a shorter time frame, gold frequently does not perform nearly as well as an inflation hedge as other investment tools. The price of gold makes rapid movements above and below the rate of inflation. This results in gold outperforming inflation rate in certain windows and substantially underperforming inflation in others. For example, the price of gold in USD has decreased over $100 in the last year, at the same time that the USD experienced a devaluation of almost 10% due to inflation. So in that one-year time frame, gold not only failed to act as a hedge against inflation, it made the inflation effect 50% worse than if the investor just held cash over that period of time.
So if there are better tools for countering the effects of inflation in the short term, what is the need and value in holding gold? Simply, gold is a hedge against widespread economic catastrophe, not inflation.
I like to look at gold in the same light I look at life rafts on an ocean vessel. If there is no catastrophe, there is not much value gained from having the life rafts. In fact, it there was an absolute assurance that there would be no emergency, the life rafts are a waste of money that could be used somewhere else.
That is exactly the role that gold plays - gold is the life raft on the Global Economic Titanic that we are all on. Despite all the failed predictions and prognostications about the imminent demise of the USD or hyperinflation, no one can accurately predict when the wheels are going to come off. That is the very nature of true emergencies. I have been waiting for hyperinflation to hit since the TARP bailouts of 2008. Not only have we not seen hyperinflation since the rapid expansion of money printing since 2008, but all the warnings bells that made me believe hyperinflation was around the corner have only continued to become louder from that time. There is no question that the chickens will come home to roost on the profligate printing of money and obscene amount sovereign debt incurred by nations in the West. I don't know when that crisis will happen, maybe a week or maybe 10 years from now - but the Global Economic Titanic is going to crash into an iceberg eventually. When it does, the value of a life raft will be immeasurable. So maybe my meme above is incorrect - instead of "In Case of Emergency - Buy Gold" it should say "In Case of Emergency - You Better Already Own Gold."
While the economic numbers don't add up for the West, they haven't added up for decades - yet a full-fledged economic crisis has somehow been avoided. It is painful watching the price of gold dive like it has in our current 10% inflation environment. I describe investing in gold like a inverse roller coaster... long slow painful downward descents with rapid and spectacular upward ascents - blink and you will miss it. All I can say is that I may end up having egg on my face for the next 10 years as I watch in awe how the global economic house of cards somehow avoids crashing down. But to me, the price of having egg on my face is worth it to have the assurance that when the ship invariably crashes that I am going to have one of the life rafts.
