Gold as inflation hedge

1. Is Gold an Inflation Hedge?

2. Gold as Inflation Hedge Gold is often regarded as a perfect inflation hedge Let’s discuss this issue by answering the following three questions: First, what is inflation Second, what are the reasons for inflation? Third, is gold an effective hedge against inflation?

3. Gold as Inflation Hedge Definition and Measurement of Inflation Inflation is an increase in prices for goods and services of an economy over a certain period In the United States inflation is mostly measured as an annual percentage increase of the Consumer Price Index (CPI)

4. Gold as Inflation Hedge This index is reported monthly by the US Bureau of Labour Statistics and takes into account the price for a basket of goods If the money required purchasing these good increases from $100 to $125 within one year, then the annual inflation rate is 25%

5. Gold as Inflation Hedge Of course, the CPI basket of goods does not correspond with the goods and services acquired by each individual Therefore, the ‘personal inflation rate’ is lower or higher than the official one

6. Gold as Inflation Hedge Keynesian theory Keynes tried to explain inflation with the theory of income determination Inflation does not directly influence prices It arises because consumers attempt to buy more goods and services than that can be supplied at full employment levels

7. Gold as Inflation Hedge Cost-push theory This third approach assumes that products and services are basically defined by their costs The price-wage spiral is responsible for this increase Here employers demand higher wages, which will then lead to higher production costs and eventually pushes again wage increase demands

8. Gold as Inflation Hedge Structural theory Oneversion of this theory proposes focuses on developing countries Here, inflation is caused by the gap between imports and exports Imports happen fast than the country’s citizens are able to pay for them Also, imports outcompete local goods This leads to an increased pressure on the local currency and an upward pressure on prices, which is inflation.

9. Gold as Inflation Hedge First, gold supply has been quite stable over time In average, mined gold increased by 1.5% over the last 100 years (including several times during which gold output increased due to wars and a reduction of demand for gold) The finite amount of gold helps to keep the annual addition of gold at low levels

10. Gold as Inflation Hedge Second, during the gold standard, when the currencies where pegged to gold and their value was determined by the amount of gold the countries had in their vaults, national inflation increased usually by not more than an annual two per cent (However, a comparison of the gold standard time with the post gold standard period is invalid if only the different monetary system is considered.)

11. Gold as Inflation Hedge Third, due to inflation, all currencies lose their value over time This becomes evident when comparing the purchasing power of $100 dollar today, with ten, 50 and hundred years ago. However, gold retains its value, or even increases it.

12. Gold as Inflation Hedge The value of gold has remained remarkably stable for centuries In 1900 the gold price stood at $20.67 per fine ounce End of December, the price was above $700 per ounce And in the first quarter of 2011 gold has reached a record of $1500

13. Gold as Inflation Hedge Another illustrative example is to see what one can buy for one ounce of gold During Roman times it was possible to buy a suit of expensive clothes for one ounce During the great depression the same was true. How is it now? It is still possible to buy a fine, tailor-made suite for one ounce of gold!

14. Gold as Inflation Hedge Relative to gold, all currencies have lost their purchasing power, whereas this precious metal has not only kept, but even gained value

15. Gold as Inflation Hedge What is the downside of gold? Of course, gold neither pays dividends nor interests and the might be better inflation hedges (depending on the criteria taken into account) Also, a look at the gold chart shows that gold does not always increase in price There are some bearish periods as well

16. Gold as Inflation Hedge Or as Warren Buffett put it aptly “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”