Why Gold is the Best Inflation Hedge

Written by Shaun Connell (Editor)

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.

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.

Lets examine each of these premises at greater length.

Gold Supply Cannot Be Manipulated

In olden times, kings did try to manipulate the supply of gold by adding lead to the smelting pots, thus creating the first instances of inflation in recorded history. The subterfuge was easily detected, however, by the simple expedient of biting down on a coin: Pure gold is so soft, it will show tooth marks while alloyed gold will not.

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 golden inflation.

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.

Source: http://standstrongresearch.com/gold-inflation-hedge/