Not long ago, we advised someone to buy gold as a hedge against inflation. That person?s reaction was, ?But gold prices had already doubled from a few years ago!?
As we think about that person?s reaction, we realised that people?s perception on the value of gold had changed immensely over the course of centuries. Two hundred years ago, people would rather trust gold much more than paper money. After all, paper money were just warehouse receipts for gold, which may well be forged or quantitatively inflated (this is, strictly speaking, fraud). Gold, on the other hand, had been selected by the free market over the course of centuries as the most reliable medium of money. It was considered far more reliable than paper because there was (and is) no way for anyone to easily inflate the supply of it at will (other than mining for it, which require significant time and effort).
Today, people?s entrenched perceptions are completely different. Somehow, by some strange reason, paper currency (with today?s technology, they can exist in the form of digital information) is mistakenly seen to be the more reliable store of value. It has come to the point that even the value of gold is measured in terms of paper currency. As we said before in How is inflation sabotaging our ability to measure the value of things?, how can we measure the value of something by using a yardstick that is as elastic as paper currency?
Now, since the gold prices had doubled from a few years ago, will it be subjected to the law of gravity and return to where it was? There is nothing to prevent gold from obeying (or disobeying) this ?law? but fundamentally, if this ever happen, the market will be behaving even more irrationally that it is right now. Think about it: if the quantity of paper currency (including credit, money substitutes, deposits, etc) is growing at a rate that far outstrips the rate of increase in the quantity of gold by a colossal margin, then the fundamental value of paper money relative to gold has to continue to fall significantly. Today, gold prices still far undervalue the fundamental worth of gold.
If we consider the way central banks around the world are grossly inflating the supply of paper currencies, we cannot help but feel that it is more risky to hold cash in the long run.
Tags: cash, central bank, fiat money, Gold, hedge, inflation
