Gold – the Winner in Any EconomyJames Cordelaine
By now, most of you are familiar with the conventional wisdom about investing in gold. It goes like this: gold protects your nest egg against inflation. The classic definition of inflation is when the economy experiences excessive growth of the money supply. In other words, inflation occurs when too much currency chases too few goods and services.
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But inflation can also refer to a gradual increase in prices we’ve all experienced, without necessarily the implication of excessive price increases. So in 1930, for example, the average cost of a new home was $3,845; the average cost of a new car was six hundred dollars; and the cost of hamburger meat was twelve cents. But in 2013, the prices of these same items became, respectively, $289,000 for a house; about $31,000 for a new car you could show off to the neighbors; and $4.63 for a pound of ground beef.
Because the dollar, like all fiat currency, loses value through inflation, investors still turn to gold to preserve their wealth, for the simple reason that the shiny metal is far less vulnerable to the ravages of year-by-year inflation. Gold retains its buying power.
One frequently cited example of gold’s ability to sustain its value is the comparison of the price of an ounce of gold to the price of a man’s suit. In 1900, a man’s suit ran between seven and sixteen dollars. In 1940, the price of a man’s suit ran $25.00, whereas the price of an ounce of gold that same year ran $35.00. In 2016, you can buy a sharp-looking mid-line man’s suit for seven hundred dollars. And the spot price of gold as of March 2016 was approximately $1,250.
But gold is a much more versatile investment than the conventional wisdom makes it out to be. Commodities Research specialist Julian Jessop at Capital Economics makes a persuasive case that gold can perform well in a deflationary period:
“… [G]old’s prolonged bull market from 2002 took place against a backdrop of generally low (and sometimes negative) inflation. Other drivers can clearly dominate. Indeed, it is not difficult to think of circumstances in which deflation could be positive for gold, many of which apply now.”
Gold’s stellar performance in our current deflationary environment bears out Jessop’s argument. Investors are now flocking to the yellow metal as a safe haven – partly out of fear, but mostly out of common sense. The Week has dubbed it “the best performing asset class of 2016.” The publication further points out, “Strong jobs data in the US and a recovery in the dollar can’t stop the precious metal’s surge.”
Yet gold’s current leap in price defies the conventional wisdom that dictates investors run to it solely as a hedge against inflation. Prices of commodities have declined, industrial production has geared down worldwide and countries are waging currency wars, making imports cheaper. Let’s face it folks – the world economy is smack dab in the middle of deflation. Yet through it all gold still retains its luster.
That’s why smart investors aren’t concerned about timing their purchases of gold. It’s a winning investment in any economy. It’s an investment for all seasons; one that will protect your wealth during periods of inflation, deflation—or what an increasing number of experts predict will be an upcoming worldwide recession.