Why is gold a hedge against inflation.

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For thousands of years, the majority of the world’s population has considered gold, not monetary specie, the true measure of wealth. While the demand for most precious metals principally arises secondarily to their manufacturing use and industrial application, the demand for gold arises from the desire to accumulate wealth.

In the last few years, governments around the world have spent tens of trillions of dollars in new “paper” money, creating massive amounts of inflation. This has led to many people — such as myself — to flock back to gold in order to protect themselves.

The wisdom of Paul Craig Roberts.

Paul Craig Roberts, economist and former aide to President Ronald Reagan, speaks about the economic outlook as the White House begins its transition to a Biden administration. He also talks about his preference for gold as an investment vehicle, despite recent charges against banks like JP Morgan for spoofing metal prices

Gold Supply Cannot Be Manipulated.

They say that everything is manipulated when it’s not going the way you want. But the gold prices and silver are manipulated. JP Morgan being fined 100s of millions for spoofing isn’t real? How about the fact there are multiples more paper gold than physical gold? These are facts. But you cannot manipulate the supply of gold, although the rising cost of extraction will affect positively the price on long term.

As such, in times of inflation when other indices of wealth are losing value, gold is the safest haven for wealth because the demand for gold will continue to rise. But why is gold seen as the best inflation hedge? There are four major reasons:

  • First, there’s a finite amount of gold, so the supply can’t be manipulated, as the supply of paper money can, simply by printing more.
  • Second, gold is easily convertible to other currencies.
  • Third, gold has been mined since prehistoric eras and in all that time, it has never lost all its value; indeed, demand for gold continues to outpace supply in both industrialized and developing countries around the world.
  • Finally, historically fiat money collapses in on itself in 40-year cycles; the US’s current experiment with fiat money began 39 years ago.

Demand for gold around the world is high and growing higher all the time. But gold cannot be created to meet that demand, and there is only a finite amount of it available – unlike, say, paper currencies which can be printed on an “as needed” basis with no greater assurance than a vague promise that next year or the year after that will bring more prosperous times.

Not even the government can arbitrarily increase its supply of gold — they can create paper inflation, but not gold inflation. We have and will have supply chain disruptions in the gold mining sector, to produce all forms of essential commodities that keep the world functioning it takes Energy, whether that’s in the form of Oil, Natural, Electricity etc. As prices continue to rise this also has huge implications on mining, production, exports and the supply chain etc. Overall, higher energy prices make it more expensive to produce commodities, which will ultimately lead to global production cuts, mining shutdowns and booming shipping costs – leading to a major squeeze in prices of gold ahead.

Gold Is Easily Convertible.

In 1944, at the end of World War II, an international conference was held in at Bretton Woods, New Hampshire that transformed the international monetary system from one based on the gold standard to one based on cooperation and freely convertible currencies.

Through this auspice, gold could be converted into any number of international currencies.

Though the Bretton Woods system of international monetary exchange was effectively ended in 1971 when US President Richard Nixon canceled the convertibility of the US dollar to gold, gold remains such a highly desirable commodity that it can easily be sold abroad in exchange for local currencies.

Gold Has Always Been Considered Valuable.

Throughout its long history, gold has always maintained a substantial value. Though the price of gold may fluctuate, it is important to keep in fact that the value of gold is absolute – differentials in the price of gold represent changes in the perception of the relationship between gold and the US dollar (or any other fiat currency) rather than shifts in gold’s true worth.

Time after time, gold has reverted to what one might call its true purchasing power against other commodities. Because of this, gold is the most effective preserver of wealth in times of economic instability.

Fiat Money and the 40-Year Cycle.

Fiat money – from the Latin for “Let it be done!” – is any currency issued by a government as legal tender. Most national currencies including the dollar, the Euro and all reserve currencies, are fiat currencies, and have been since 1971 when Nixon terminated the conversion of dollars into gold.

Many economists studying the relationship between paper money and gold have noted the existence of a cycle, approximately 40 years long, at the end of which paper money has decreased so much in real value that the economic collapse of a nation is imminent. Historically, each time this happens, there has been a run up in the price of gold.

Economists time the beginning of the current 40-year cycle with Nixon’s actions in 1971 – which means that we’re nearing the end of the cycle and concomitant collapse of the national economy right now.

Gold is not about making big bucks. It’s about protecting your wealth and a hedge against inflation.

Disadvantage of owning gold and limits of gold as a hedge against inflation.

Gold is not about making big bucks. It’s about protecting your wealth and a hedge against inflation. The lack of return on investment it’s because price of gold is too much stable.

The inflation adjusted price of gold has been approximately constant for the last 15 years. M2 has increased by about 8% per year and gold about the same. In the early 2000’s it made some big gains but never approached it’s 1980’s peak. In order for gold to in real terms reach the same peak it had in 1980, when M2 was a mere 1.5 trillion and gold cost $800 per ounce, it would need to cost $11 000. M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.

In US The BIGGEST disadvantage to owning gold is simple: the IRS TAXES the re-sale of gold coins at a whopping 28%!! THAT is a lot. But it’s not the same everywhere, for exemple no tax in the UK.

Buying silver to hedge inflation and a bond crisis.

Interest in buying silver as the precious metal best suited to hedging against inflationary government debt levels around the world, and a consequent imminent bond crisis, is growing among investors.

800 ounces of silver at $5.25 an ounce in 2002 for $4000 our 800 ounces is now worth $19.200 our $4000 in Federal Reserve notes from 2002 to 2021 would have lost 47.2% of its purchasing power a loss of $1888.00 had we put that currency in a shoe box and stowed it away in our safe.

Articles about investment in gold and silver typically receive ten times more page views than items about investment in stocks, for example. This does not necessarily mean that precious metals are actually the better investment but it does say a lot about investor sentiment and likely future momentum. historically the primary purpose of stacking silver has been as an inflation hedge, however I believe it can also perform as an investment moving into the future as the demand for this metal increases for industrial use. The more solar panels are manufactured more silver will be needed.

Besides the bulls have a good case, and are still not leaning on an extreme position to justify buying precious metals. There is none of the top-of-the-market distortions of US economic data as seen in the stock market right now.
If you look rationally at 10 years of rising precious metal prices then the story to date has been one of slow but sure growth, leaving gold prices four times higher and the actually the best performing asset class of the past decade, apart from silver which is up six-fold, albeit with far greater volatility along the way.

There is no 80 per cent price spike in the past 13 months like US stocks. When markets spike it is almost always the time to get out. Gold and silver just are not there yet or even close to it. Indeed, the fundamental drivers of gold and especially silver prices are still in place.

Consider inflation In the UK inflation is running at around 3.5 per cent against GDP growth of 0.4 per cent, so in real terms the economy is contracting by three per cent. Then again, we hear reports of 20 per cent salary hikes in Chinese coastal cities and a bubble in Chinese house prices.

US stock market and silver.

And surely the biggest forward predictor of inflation has to be the surging US stock market. Share prices are being pushed up by a monetary bubble with very little real evidence to support a strong economic recovery. Once this bubble pops, up will go bond prices again, but for how long can that last?

Not for long surely if the laws of supply and demand mean anything. All over the world governments face mounting deficits due to their bailout packages and a shortfall in taxation from the worst recession since the Second World War, as Forbes warned. This means a gigantic government borrowing program is in progress. We know this much for a fact and do not have to speculate. Now what normally comes with increased government borrowing? Higher inflation is the answer. This slowly, or not so slowly, devalues the debt burden of high bond issuance over time. The bond owners get a haircut to pay for government excesses.

Higher interest rates lower bond prices.

Of course, what happens is that bond buyers wise up and demand higher and higher rates of interest to fund government debt. So, you end up like in the late 1970s with high interest rates and high inflation. That also means lower bond prices as interest rates rise. You get a lot more buyers for gold and silver which are very tight markets on the supply side. In the late 1970s the gold price rose eight-fold from 1976-1980, and silver rose a staggering 25-fold. Silver is in shorter supply than gold, and so does better as prices take off.

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