Gold as Inflation Hedge - Does it Really Work? | Sunshine Profits
Earth from catastrophic demand pull inflation and geographical inequality. With Smaug sitting on this gold, the general price level of the world of have led to a more cooperative relationship in the north between dwarves. Although the value of gold would certainly decrease with the it slowly enough to avoid too much inflation, or enact policies to counter its worst effects. to the dwarves establishing mutual relationships with their neighbors, implying to go to the Lonely Mountain after Smaug's death because while he did. that this is true – the powerful Smaug hoarded a lot and was really obsessed with his shiny treasure. The Chinese dragon is also believed to hoard a lot of gold. People are not aware that relationships may change depending on the But when bond yields jump as traders are afraid of inflation or don't.
In hindsight, this increase in the money supply may have been the key factor in the emergence from the Depression. But that didn't solve the problem permanently. It just postponed it. Once again the price of gold needed adjusting. But this time there was no gold in the hands of private citizens for the government to steal.
This put the government in a bind because although US citizens could not own gold, foreign governments could continue to present their foreign exchange tickets at the "gold window" and the US was obligated to pay up in Gold!
And that is exactly what France decided to do. So in President Nixon ended the US gold standard pretense. At that point the price of gold bullion was allowed to float freely and find its own level. This time rather than take all the Gold from the people since they had none the Government raised money by allowing the people to buy Gold back at the new higher free market prices.
Thus the government was able to profit once again from the gold FDR stole from its citizens.
Gold as an inflation hedge? Well, sort of...
Government gold sales had a tempering effect on gold prices for a while as the government liquidated it's "excess" gold bullion. But by the late 's the government had stopped its gold sales and the price really took off.
Many felt that this rise was in response to inflation fears and partly it was but partially it was pent up demand and fear, as we will see in a moment inflation doesn't necessarily translate into higher gold prices. But fear of any sort usually does translate into higher gold prices.
In the price of Gold peaked and the annual inflation rate declined but cumulative inflation climbed steadily upward. If gold were a true inflation hedge, gold would have climbed with it.
But in inflation adjusted dollars the scene is even worse.
So even though inflation rose Inflation was slow and steady but not enough to cause fear. So Gold was not a very good inflation hedge! So why did Gold rise in the new millennium?
Partially because it is a commodity like all other commodities and demand has picked up from China perhaps they got tired of the gold manipulation game. But mostly because fear reentered the market.
Smaug and the questionable relevance of “transmission mechanisms” – Freethinking Economist
And the more fear there is over defaults, inflation, etc. So although Gold isn't a perfect inflation hedge in the short run it is a very good crisis hedge.
We can see this clearly in chart 1 with the sharp decline in the inflation adjusted price of gold from through And then even though inflation more than doubled from 1. However, if you had held it since you would still be ahead of inflation.
Gold Prices In the first decade of the new millennium inflation started out moderate at 3.
Base on previous decades you would expect that the price would have been flat or perhaps even falling. However, that is not what happened at all. Instead Gold was once again the top performing asset class. Cumulative inflation was So in this case we have neither inflation nor deregulation to account for the rapid rise in gold prices.
So, what could account for the increase? When you own a bond, it is simply an IOU from a company or a government. The same with money in the bank.
Stocks are simply pieces of paper saying that you own a portion of a company, but the company can go bankrupt. Inflation is bad when it gets too high, but that doesn't make a modest amount of inflation bad. A lot of our public debate about inflation is like trying to treat a case of frostbite while people keep shouting that heat is a terrible thing and then angrily tell you a long story about forest fires.
Some of the people warning against any inflation under any circumstances either should know better or actually do. They have various political or ideological motives. Some are under the spell of fringe economic theories, like Hayek's. Some are simply seeking short-term advantages for particular business interests, such as the banking sector, that benefit directly from low inflation although the wider economy might suffer. Some, including a healthy slice of libertarians, take their economic thinking from science-fiction or fantasy media and games.
The enthusiasm in some quarters for the fictional virtual currency BitCoin is partly driven by genre-fiction economics. Bitcoin imitates gold to the degree that the processing of making it is called "mining"and there is a fixed maximum that can be generated, in imitation of the old gold standard, so that eventually the BitCoin money supply will become inflexible and incapable of expansion. This will make BitCoin immune to inflation assuming anyone accepts it at face valueand in fact make the currency deflationary.
Inflation and deflation are about how much money there is compared to how much stuff there is to buy with the money; when the money supply grows too fast, prices grow too fast. If the amount of goods and services money could buy kept growing, but the money supply didn't because all the money had already been created, as in the BitCoin plan, then the existing money would become more and more valuable as prices kept dropping, as in the Great Depression.
BitCoin enthusiasts think this a good idea, partly because they read books like Neal Stephenson's Cryptonomicon and partly because World of Warcraft has been on the gold standard for years. So I'm going to stoop to the fantasy-example level. Let me use The Hobbit to illustrate the dangers of an inflation-free world. Tolkien's world, like most fantasy worlds, seems to feature virtually no inflation.
A piece of gold is a piece of gold, with value that never ebbs. This kind of tidiness and solidity is part of the appeal to many digital goldbugs, who like fixed numbers and find the arbitrary and negotiable nature of money unsettling. In fact, Tolkien's world is probably deflationary, in that ancient treasures seem only to appreciate in value.
Treasure just gets more precious with time because, as in most heroic fantasy set in an idealized pre-industrial world, there is virtually no economic progress. The Hobbit of course features a dragon, Smaug, who is sitting on a vast hoard of gold and jewels which represents basically the entire money supply for several hundred square miles.
Smaug is quite literally wallowing in his wealth. He has made a big pile of it and is sleeping with his belly on it, while everything else around him for miles and miles is a wasteland. This is all sensible enough draconian behavior because there is no inflation, and therefore Smaug has nothing to lose. In fact, a deflationary world is excellent for Smaug. The money underneath his scaly belly only gains in value as he naps. If prices in the rest of the economy keep falling, then Smaug's gold will actually buy more this year than it would have last year, and buy more next year than it would this year.
He doesn't have to worry about investing his money, or making more, because the money he has keeps gaining in value.