How Come Gold Is Perceived As The Best Inflation Hedge?
One popular belief about gold in modern times is that by owning it one may efficiently protect against inflation effects. The main negative effects of inflation as reflected on daily life are the constant decrease of purchasing power and the equally constant rise in prices. Why has gold acquired this reputation and more importantly, is this reputation founded?
The why part is relatively easy to answer. There is a very long tradition in the developed economies during which gold constituted the material from which money were actually made. Gold was money. Governments coined money out of gold and gold was perceived as having more value in comparison with other goods. This tradition strongly influenced the perception of money in modern times, when people still find it difficult adjusting to the fact that paper money are worth only as much as the trust they invest in the power of the economy. Fiat currencies are not convertible into gold and this makes people uneasy and puts them on a search for "real" value. In this search they turn to gold as the only universally known and accepted value. The economic science, however, states clearly that no economic good has an intrinsic value, but only the value gained through economic exchange, circulation and rarity. This also applies to gold.
As to whether the inflation hedging abilities of gold are founded or not, we need to turn to figures in order to shed light on the matter. Figures have been quoted a lot after the demise of the Breton-Wood system in 1971, with the inflation-hedging role of gold as one of the central matters of the discussion. In spite of various figures floating freely and advocating for or against gold as inflation hedge, there are few sources with authority on this issue. Perhaps the best documented of them is "The Golden Constant" book by Roy W. Jastram, which draws a comparison between the value of gold in the United States and The British Empire for 416 years and the price of the main commodities traded in the two territories. The figures based conclusion of the book is that gold tends to have higher value in deflationary economies, not in inflationary ones, such are the economies based on fiat-currencies.
The book admits however, that gold does provide some protection against inflation, inasmuch as by inflation we understand a decrease of purchasing power and a temporary rise in prices.
But if we take the economic definition of inflation as an increase of monetary mass and credit without coverage in goods and services, we can observe that gold does not protect investors in the way claimed by sustainers of the gold standard. Indeed, the monetary mass increases at a much faster pace compared to the value of gold, resulting in an overall slow decrease in value for the yellow metal and in the demonstration of the fact that gold alone cannot protect or hedge against inflation.
Article Source: FxTradingStock.com
About the Author
Learn from professional advice how to buy gold bullion in times of recession.
by: Jack Wogan
Total views: 30
Word Count: 495
Date: Sat, 24 Jul 2010
Publish/Share this article
To use this article on your site click here to get the HTML code
Rating: Not yet rated
Login to vote
Related Articles
How to Invest in 2011 and Beyond Without a ClueWhat Is Forex Trading?
Quick Way To Trade In Shares
ATM Calendar Spreads, Are You Aware Of The Hidden Gotchas?
Emini Day Trading Requirements
The Coming Death Of The Dollar
Fantastic Fundraising Suggestions
Winning Big In The Share Market
