Most people think of gold as an inflation hedge. This is not true either historically or theoretically. It can be true if the inflation is one that cause instability because the mass of the population can no longer afford basic amenities like housing, education, health care, food, energy: such as now.
Our particular inflation is very destabilizing.
However in a strong economy growing at trend 4 percent with affordable amenities, such as the US had in the fifties and sixties (in spite of - or partially because of a 70 percent tax rate) inflation was a result of healthy economic growth and not a cause of instability so gold was not really necessary as a hedge against instability.
Yet gold played a hidden role in keeping debt in check as debt had to be convertible back into gold - so it was stabilizing behind the scenes.
When we broke the gold conversion in 1971 debt instruments began to be invented, attitudes towards balance sheets shifted, experiments with derivatives sprang into existence - and many credit this with the birth of modern finance which, they say, brought the standard of living up across the globe.
Perhaps. In some ways it did. If you look at the world in a very short term sort of way.
But by the end of the decade inflation has careened out of control and had to be tamed by Volker raising rates to 18 percent, causing a a debt reset that sent the global economy into a long recession.
Since then the world economy has been lowering rates continually fostering a second wave of debt induced inflation that is so out of conrol that there is no advanced economy whose debt to GDP ratio is under 100 percent and the global debt is growing at an alarming rate.
This in spite of central banks raising rates a tiny bit (by historical standards.)
In fact raising rates now only increases debt by adding to the debt service load!
Talk about No Way Out.
And talk about Instability.
This instability is paralelled in the political and social world.
People who can't afford housing and food and care for their kids are angry.
And unscrupulous politicians spring up to take advantage of this.
We now have leaders and candidates who preach hatred, violence, retribution, exclusion, and scapegoating. (Just like in the last virulent debt laden period of the 1930s.)
It is once again socially acceptable in the western world to hate Jews and Blacks and Browns and anyone who thinks or looks differently.
Whether you're for or against this, you have to admit it is terribly detsabilizing.
And gold is a hedge for that type of instability too because it leads ultimately to more financial instability.
This is why the world's central banks are now loading up on gold. It is why the Governments of China and India are actively encourging their populace to load up on gold.
It is not yet part of the US conscsiousness, but it is making inroads.
You see it if you are active in the hard asset markets. You see it in ads on youtube and on television. And you're begining to see it in the recommendations of astute asset managers.
It's early.
If you're on the fence you haven't missed anything yet.
The instability will get much worse before it gets better.
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