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Gold Is An Inflationary Least Since Late 2011

|About: SPDR Gold Trust ETF (GLD), Includes: SLV

One of the most ironic aspects of gold since its peak almost 2 years ago, is that since then it has been an inflationary currency. I've argue and written ad nausium that gold is not a currency, at least not a currency other than any other item one could use in a barter system. In this article I will cede the point that gold is a currency, and when I do that, I will demonstrate that gold as a currency is far more inflationary than the US dollar, at least since gold's peak.

Gold peaked around $1,900 in late 2011. That means in late 2011 an ounce of gold would buy 1,900 sausage biscuits at Mc Donalds (NYSE:MCD). Today, that same ounce of gold will only buy around 1,400. That is a depreciation of 1,400/1,900 = 0.74, or about 25% in less than 2 years. That is a compounded rate of inflation of about 12% per year (1.12^1/2). 2 years ago I could take $1 and buy 1 sausage biscuit and today I can take $1 and buy 1 sausage biscuit. If I was using gold, I would need 25% more gold to buy the same sausage biscuit. Gold, depending on the time frame chosen, is far far far more inflationary than the US dollar. Gold peaked around $800 back in 1979, and fell to around $250 by 2002, that is a decline of over 70% in value.

In conclusion, two of the myths perpetuated to support the demand for gold is that gold is a currency and that it is better than a "fiat" currency at fighting inflation. Neither of those claims are correct, and the price decline between 1979 and 2002, and 2011 and today prove that. Price stability/store of value is one of, if not the most important functions of a currency, and gold and other precious metals don't offer that. A gold standard simply results in greater price instability, and does not eliminate inflation. Worst of all, it is very heavy, difficult to carry around and you can't transfer it over a wire. Gold is only a currency is a barter economy, and that is hardly a benefit in today's global economy. You can not take an ounce of gold and spend it in a store, and if the merchant does accept gold they will only exchange it for the US dollar or other established currency value of the gold.

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iShares Silver Trust (NYSEARCA:SLV)

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.