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I feel a bit confused.

I read something on this site about gold being inflation-proof. Other people stated that it is untrue.

I feel confused why. You can print money, but you can not print gold, right?

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    Can you please clarify? Are you confused about why gold isn’t inflation-proof? If so, it would help if you could provide some context of the discussion leading up to the claim. – Lawrence Oct 6 '19 at 8:13
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    "I read something on this site" - Link please – user71981 Oct 6 '19 at 10:01
  • Hello, so for the past 10 years, gold has averaged 4.3%. I think that beats average inflation rate. And money can be printed while gold has a finite amount on earth, right? – JadeFlag Oct 6 '19 at 17:12
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    I might add that gold isn't necessarily any more immune to inflation than other commodities or equities. Cash is one of the few things that is highly affected by inflation. The reason being is that when cash is worth less things you can buy generally cost more. – JohnFx Oct 6 '19 at 23:22
  • Ironically, gold is trade in dollar ;-) – mootmoot Oct 7 '19 at 8:28
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You can print money, but you can not print gold, right?

But we mine gold (thereby increasing the supply), and recycle it.

The bottom line is that -- as a commodity -- the price of gold is driven by demand.

The three demand drivers are:

  1. Industry (mostly electronics)
  2. Commerce (jewelry)
  3. "Investment" speculation

Sometimes speculators want more due to fear, and other times they want less, thereby driving down the price.

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  • Yes but overall it has a finite supply, right? I still may feel unsure how this relates to inflation. – JadeFlag Oct 6 '19 at 17:09
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    @JadeFlag it's speculated on. There's no intrinsic value except for what industry needs. – RonJohn Oct 6 '19 at 17:29
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    @JadeFlag gold is a hedge against inflation because people want it to be. There's no intrinsic or mathematical reason for it to be so. – RonJohn Oct 6 '19 at 21:26
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    There's no intrinsic or mathematical reason for anything. Gold has specific qualities - fungibility, rarity, durability - that make it an ideal form of currency. It has been since the earliest days of human history. You could say the same about the new digital currencies. There's no utter, unbeatable, final logic why "you" "must" accept them as currencies. Many people think they are silly crap - and many people think the same about gold. And many people think the same about government currencies. – Fattie Oct 7 '19 at 1:11
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    @Fattie there are intrinsic reasons for lots of things. Why, for example, gold is yellow and not very chemically reactive. And that rarity makes it a bad form of currency when there are 7 billion people and they all have to buy and sell stuff. There just wouldn't be enough of it to go around. – RonJohn Oct 7 '19 at 1:33
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Similar to @Lawrence, it isn't completely clear to me what your exact question is but I'll try to offer some thoughts which might help.

First, I'd like to clarify with my interpretation of the term "inflation proof" since I haven't found a clear definition on the internet.

I would call an asset inflation proof if it appreciates at least at the inflation rate. Since no one can guarantee this for any asset which is freely tradeable, I'd weaken this term to: The asset has to have at least kept up with the inflation rate in 9 out of 10 years.

Now let's come back to gold. Take a look at some historical gold prices and US inflation rates. For example, in Jan/2013 we had a gold price of about $1850, while in Jan/2016 it was about $1160. In those years, US inflation was approximately 1.5%, 1.6%, and 0.1%. So while gold lost almost 40%, the inflation rate was positive.

According to my definition above, gold doesn't seem to be inflation proof since this isn't the only time span when this happened.

But history has proven gold to be a must have asset in crisis which might be the reason for the drop in gold's price that I described. If we look at gold's price between 2007, the year before Lehman Brothers went bankrupt and 2011, which might be the year when things started to get better again, gold rose from approximately $800 to $1800.

Finally, gold doesn't pay interest or dividends so if you want to outperform inflation by having gold, you rely on growth in gold's price. On the contrary, if you own some blue-chip stocks, which pay high dividends, even if stock price remains at the same level, you may have a chance to outperform inflation rate (but of course you might still lose, because of a drop in stock price).

Hope that helps to answer your question!

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  • Hello, so for the past 10 years, gold has averaged 4.3%. I think that beats average inflation rate. – JadeFlag Oct 6 '19 at 17:10
  • @JadeFlag The Dow Jones also far exceeds 4% over the last 10 years - that doesn't mean it's inflation-proof. – Grade 'Eh' Bacon Oct 7 '19 at 13:26
  • @pcalc note that when companies pay dividends, they lose value. It doesn't change your argument, but it still requires that companies grow to make up for the dividend they paid out. – D Stanley Oct 7 '19 at 14:07
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Some thoughts,

  1. It's not "inflation! proof!" Nothing is. But gold rarely if ever suffers inflationary periods

  2. Considering hyperinflation. Gold has never suffered hyperinflation. You could confidently say it is hyperinflationproof. Whereas it's a commonplace in history that fiat currencies suffer hyperinflation. So that might be what you have in mind.

  3. "We can't print gold" but we mine it. Indeed historically, when there has been gold find somewhere, the "price has gone down" in general. (But not a lot, not like when government currencies collapse, as they often do.) So sure, of course obviously, the scarcity of gold ("we can't print it - it is created only when neutron stars collide"* ) is the reason, sure, you're correct. No mystery.

  4. The practical upshoot of buying gold. The OP will be between 20 and 50 yrs old. OP will live for another 20-50 years. The simple fact is, owning gold is a "decades" thing. If you're thinking of buying some gold for a year or two, just forget it. It's trivial to point to periods of 10 or 20 years when gold consistently went up and it's trivial to point to periods of 10 or 20 years when gold consistently went down.

I can absolutely assure you that if you own a lot of gold for 10 or 20 years during an up run, you'll feel terribly clever.

And I can absolutely assure you that if you own a lot of gold for 10 or 20 years during a down run, you'll have made a big hole in your life. Abstract statements about hedging inflation will go by the wayside. I really wouldn't worry either way about vague conjectures like "if inflation..."


* Story used to be gold was created only in certain supernovas. Current thinking is that gold is only created when certain neutron stars collide. Go figure!

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  • Yup. If you look at gold between 1980 and 2001, it lost a lot of purchasing power. – zeta-band Oct 7 '19 at 18:03
  • Sure. It's very easy to point to a decade or two when gold skyrockted; it's very easy to point to a decade or two when gold flopped. The whole "is it inflation proof?!" idea is a distraction. Yes, gold is "hyperinflationproof" (but - whatever). – Fattie Oct 7 '19 at 18:44

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