Gold (GLD) is probably the most misunderstood asset in all of investing, and likely one of the more emotional topics, rivaled only by companies with passionate fans like Apple (AAPL).
Recently, a friend of mine -- Skyler Greene -- wrote another article in what appears to be a series on why gold isn't a safe haven, isn't an inflation hedge, and isn't a strong "safe" asset at all. His views are fairly typical of the anti-gold bug crowd, but I think they need to have a response.
I'm going to respond to some of the assertions, because while some make sense, most simply miss the entire point of owning gold in the first place.
Is Gold a Good Inflation Hedge?
Skyler's recent article, "Gold: The Worst Inflation Hedge Ever" made quite a few fairly basic mistakes that I've seen probably 10 times over the last couple of years.
First, he compared the yearly inflation rate with the non-inflation adjusted price of gold. Comparing those two charts is basically just random. If he wanted to compare the gold price rate change to the inflation rate every year, that would be one thing, but comparing those two charts proves nothing at all.
Second, he seems to be confusing inflation and changes in the government-reported CPI. That's almost exhaustively not what most gold investors are trying to do when they buy gold. The goal isn't to just keep up with CPI changes during normal economic conditions -- otherwise, we'd all just buy TIPS.
No, the goal is very, very different, as I'll be talking about in a minute.
That said, I've answered this question in the past, in my article "Is Gold Really a Good Iflation Hedge? I explain, specifically:
Some people believe that because gold doesn't instantly respond to inflation, it must not be a good inflation hedge. This is stupid, honestly. Over time, gold keeps its value - that means it's a long-term hedge. Short-term, every market is volatile, but over time, gold keeps its head up.
The Real Inflation-Hedge Character of Gold
Gold exists not just as an inflation hedge, but as a currency failure hedge. If the dollar "dies" -- whether through hyperdeflation or hyperinflation -- then gold essentially wins.
Some might then argue that we should just put money in an index fund, because it offers the same protection. This is, of course, absurd. It's paper, which means that a political movement can delete it. It can be gone. In minutes.
Your assets can be frozen. The economy can fundamentally collapse. Corporations can be nationalized. You can't skip town with a trunk full of stocks, but you can certainly do that with a box of gold coins. And that'll never change.
Gold is a fear play, and gold investors shouldn't be afraid of admitting that. Rational fear right now is a wonderful thing, because anyone who isn't afraid of our economic fundamentals needs to open up a bloody history book, because the age of the dollar is about to end, because the economy isn't getting better, and because the government and media are essentially oblivious to the real economic problems we face.
In the end, gold is long-term safety in a way that no other asset can remotely come close to providing. It's what I want to own for if the economy sinks and we have to begin over again. And that's why I buy more gold and ever silver (SLV) every month and will do so for the rest of my life -- it's just not safe not to do so.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I own physical gold and silver and will be buying more.
