Gold Is Not An Investment; Not An Inflation Hedge

Analyst, Author, and Owner of Kelsey's Gold Facts
November 15, 2021

WHAT GOLD IS NOT

After reading recent articles by others and listening to what continues to pass as ‘fundamentals for gold’, I think it might be helpful to restate, and elaborate on, two specific things which gold is not…

  1. Gold is not an investment.
  2. Gold is not a hedge against inflation. 

GOLD IS NOT AN INVESTMENT 

According to Investopedia:

“An investment is an asset or item acquired with the goal of generating income or appreciation.”

Since gold is not a producing asset, i.e., no dividends or interest, the remaining objective can only be to acquire gold and hold it for appreciation purposes.

Appreciation is an increase in the value of an asset over time...

“When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.” …Investopedia

The implication in the definitions and statements above is that as an asset increases in value over time, it creates wealth.

If gold is an investment, what is its value? Gold’s primary value is in its use as money. Gold is original money and the original measure of value for everything else.

To be considered an investment, gold’s value must have the potential to increase over time. Gold’s value, however, is constant and unchanging.

Below is a chart of gold prices for the past century. The prices are adjusted for the effects of inflation…

Since the price of gold peaked in 1980, there has been NO INCREASE in the value of gold; and a lot of volatility on the downside. The volatility in gold’s price has everything to do with the US dollar –  and nothing else.

If you owned one ounce of gold in 1980 at $650 oz. and owned it in 2011 at $1895 oz., and again in 2020 at $2060 oz., there has been no increase in value.

Sure, the price went up; but the increase in price reflects only the loss in purchasing power of the US dollar (the effects of inflation) and not any increases in gold’s value. Also, there is no reason to expect anything different in the future.

As such, gold is not an investment; nor has it ever been. (see Gold Not An Investment; You Won’t Get Rich)

GOLD IS NOT AN INFLATION HEDGE

Some people promote gold as a hedge against inflation. They are wrong on two counts.

First, they are incorrect in what they mean when they refer to inflation and second, gold is not a hedge against inflation.

Inflation is the debasement of money by government and central banks. The inflation is created by continually expanding the supply of money and credit. The expansion of the supply of money and credit cheapens the value of all the money in circulation, leading to a loss in purchasing power of the currency – the US dollar.

What most people usually mean when they say ‘inflation’ is  an increase in prices.

A general increase in prices for most goods and services over time is the result of the loss in purchasing power of the US dollar. The dollar’s loss in purchasing power is an effect of inflation. The inflation, however, has already happened.

Inflation is an intentional creation of government and central banks. The Federal Reserve is always creating new money. Our banking system functions on a fractional-reserve basis. (see Fractional-Reserve Banking Is The Elephant In The Room)

Moreover, the effects of inflation are volatile and unpredictable. What happened in the 1970s was different from what happened after Federal Reserve actions in 2008 and again last year. And the intended effects of Fed inflation are losing impetus. (see Fed Inflation Is Losing Its Intended Effect)

Complicating matters is the tendency to refer to economic effects associated with supply demand issues as ‘inflation’ due to their impact on prices:

The current share of rising prices resulting from changes in economic demand, such as supply chain bottlenecks, pent-up demand, etc. have nothing to do with inflation or its effects and are a totally separate factor in price changes for various goods and services.” (see  It’s Not Biden’s Inflation)

There is no hedge against government action to create and destroy its own money; but gold, when used properly, can act as a restraint on governments tendency to do so.

WHAT GOLD IS

Gold is real money. It is original money. It is the measure of value for everything else. Its value comes from its use as money and that value is constant and unchanging.

Gold’s higher price in dollars, over time, is an inverse reflection of the decline in purchasing  power of the US dollar.

Substantial price increases in gold of lasting duration come after the fact; not before.

We will need to see renewed, lasting, significant weakness in the US dollar, manifest in the form of much higher prices for everything we buy and sell, IF the gold price is going to move above above $2000 oz.

If that does happen, gold can help you preserve your wealth. Any increase in gold’s price would help offset the higher cost of living.

That is all you should reasonably expect from gold. To expect more than that is fantasy and delusion.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

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Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.

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