Today I heard it again on the car radio: An advertisement claiming that since gold has topped $1,500 an ounce, it’s a “must buy” for every responsible saver.
If only it were true that I could protect my family from economic Armageddon by buying gold. Unfortunately, the hard facts are that, increasingly since 2000, gold has been the opposite of an inflation hedge. Even worse, when interest rates rise in response to inflation, gold will fall in value -- maybe by a lot.
The historical relationship of gold to inflation, i.e., that it is a hedge, is no longer true. Gold has been “financialized” by Wall Street, and its price is being driven by institutional speculators that buy it by borrowing money at near 0% interest. As long as interest rates remain low, the cost of betting on gold is very low and money flows into the gold market.
As gold prices soar, individual investors need to beware. One day, interest rates will start to rise -- and gold prices will plummet. Innocent victims who buy gold because of a mass market sales pitch will be sorry.
My strong advice to readers is don’t be a gold bug. It’s only a matter of time before the Fed exterminates you.