Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold as a System Hedge

Commodities / Gold and Silver 2013 Aug 16, 2013 - 08:26 AM GMT

By: Matt_Machaj

Commodities

Last week we focused on the idea that gold is not an inflation hedge. Today, we will develop this notion even further. If we’re talking about gold as a hedge, it is rather a system-hedge than an inflation-hedge. Since 1973, when the dollar was allowed to float, gold has confirmed this view.


When it is wanted as a dollar alternative, the price of gold goes up.  This takes place when the trust in the dollar plummets, or actually when the trust in the dollar-dominated-system plummets. Gold rose during the end of the 1970s because of expressively high inflation. But it was not only inflation that was decisive. This high inflation led to distrust in the dollar, therefore, gold became the alternative. The general trend of gold looks a lot like increasing CPI:

After the 1980s recession and end of the short-lived gold bubble Volcker tamed the dollar, which renew trust in it. The next 20 years were times of a noticeably strong dollar and stronger faith in this paper money. The conditions also paved the way for enormous increases in debt of the economy, which transformed the United States into the greatest debtor in the history of human civilization. During that time despite positive inflation gold was dropped as a “currency alternative”, therefore lost its value. The dollar was drained by mild inflationary forces; gold did not keep the pace and went down:

With oversupply of US dollars, the credit situation was reversed in the 21st century. Over indebtedness in the American economy has shaken the trust in the dollar-dominated system (especially due to agency debt and private debt). As Paul Samuelson called it, the “run on dollar” was triggered from 2001. This was visible in the decline of the dollar against other currencies, and also gold became a reliable alternative. The pace of inflation was overall no more impressive than it was for the previous 20 years. Yet suddenly the relation between gold and dollar had shifted, and the price of gold grew at a much higher pace than the dollar was losing value. Why? Because of the system dynamics and lowered trust in the dollar.

In any case gold is not really an inflation-hedge. It is a special investment vehicle that requires careful focus and analysis separate from only inflationary forces. Those forces no doubt affect the gold market. But not in a way many people often suggest, and in a way which may lead to misplaced investments. 

The above is a small excerpt from our latest gold Market Overview report. If you have a free account with us, you can sign up for these reports here.

Thank you.

 

Matt Machaj, PhD

Sunshine Profits‘ Contributing Author

Gold Market Overview at SunshineProfits.com

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Matt Machaj, PhD and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matt Machaj, PhD and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Matt Machaj, PhD is not a Registered Securities Advisor. By reading Matt Machaj’s, PhD reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Matt Machaj, PhD, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in