Some people have an understanding of why so many people invest in gold, but i hope to shed some further light on this subject on the uninformed, and maybe some extra insight even to the ones that know already. The main purpose for people to invest in gold is not for capital appreciation, though based on the increases in the price of gold over the years this might seem to be the case. The purpose is capital protection against inflation and against down turns in the market. Inflation is linked with the concept of Fiat Currency, which is money that holds no intrinsic value to it other then through government regulation. Which also means the Value of the currency can go up and down based on the total supply of it in the Economic System.
Gold on the other hand is used as a hedge against inflation and to protect the value of your current assets into the future. The best method for demonstrating this is not to compare the value of it to a Fiat Currency but to the value of other material items. I will use an example i found for comparing the value of 1 oz of gold to the cost of bread. Scholars estimate through presevered records that in 400 BC. 1 oz of gold could purchase you 350 loaves of bread, now compare this with the modern cost of bread in USD and compare with the value of 1 oz of gold in USD. Gold is currently at arround $1400USD for 1oz. of Gold which divided by 350 comes out to $4USD per loaf of bread. Seems to me a fairly accurate comparison when u take into account this is over the span of almost 2,500 years of human history. Though due to speculation on the price of gold will raise the price of gold artificially to create a bubble, which would account for the difference in the price of bread to gold ratio being different by a few cents. The chart below shows the value of the US dollar in purchasing power since the creation of the Federal Reserve.
It's funny how guards against inflation look like capital appreciation if you don't take inflation into account. Nice article.
ReplyDeleteI'm glad that gold is an option, but I'm also glad that money isn't directly linked to something that's fixed in quantity. Imagine going to a country with all the resources and knowhow it needs to vastly improve its infrastructure, but there's not enough money to pay the people to do it. It's like showing up at a construction site where they have all the nails, boards, and equipment they need. But they can't build. "Sorry, we ran out of inches."
Fiat money is helpful because money isn't wealth, it's a measure of wealth.
actualy that would describe the infrastructure of the US. The idea of Fiat Currency also creates the idea of debt and credit.
ReplyDeleteAdded in a chart to show the devaluation over time of the US Dollar.
ReplyDeleteI've always stuck with Silver, myself.
ReplyDeleteHow much do you think you need to get started?
ReplyDeletei agree with what SKS FKF said we dont need money directly linked to any mineral.
ReplyDeleteThat's a nice ski slope, oh wait...
ReplyDeleteI'm depending on silver year after year :)
ReplyDeleteGREAT quote on the graph. JMK had a way with words, particularly for an economist.
ReplyDeleteThere is actually a lot of talk over switching over to the Yen as a safe haven currency. Interesting post. Thank you for sharing!
ReplyDeleteif the inflation rate of the yen is less then that of the USD then yes it would be a viable alternative, but it still suffers from the same problem in that it is a Fiat Currency.
ReplyDeleteThe chart is kinda deceptive, because the actual wealth we have has also been increasing with respect to the amount of gold we have to account for it. It's better to measure inflation in relation to commodities people actually consume.
ReplyDeleteHowever, it makes an excellent point about the strength of gold as an investment.
Actually the chart depicts the purchasing pos=wer of the dollar not the ratio between gold and the dollar. The CPI or Consumer Price Index measures the change in generaly price of consumer products.
ReplyDeleteI used the 1 oz of gold to loaves of bread comparison as it is one of the earliest comparitive information i have on the value of gold
Oh, I didn't realize that. That's pretty absurd, then. We've really got to get control of the currency out of the hands of people whose interests are divorced from everyone else's.
ReplyDeleteI buy gold to prevent the massive inflation on my currency.
ReplyDelete