Why Gold Can Surge, Even With Inflation Expectations At Zero


Photo: Covilha via Flickr

A question we’ve heard lately is: why is gold rallying when inflation expectations are nil?First of all gold historically has been a lousy inflation hedge, which should make you question whether its connection to inflation is at all warranted.

After all, let’s think through what inflation expectations really mean. If investors saw inflation, it would mean they saw a scenario whereby too much cash was flowing into the economy, creating price increases in things like wages, rents, and normal consumer goods. Or to put it another way, it would mean they see very little slack in the economy.

But really, what about this scenario would make anyone want to buy gold? What good does gold do in this scenario?

Where gold could be valuable is in a scenario where the world’s sovereigns are playing games with their balance sheets, running on the bring of insolvency, and aggressively engaging in competitive devaluations, basically threatening the stability of the fiat money system.

Then, it’s easy to see where gold is a hedge. It’s the ultimate non-money rising in value when money itself is feeling instable.

You can still quibble about whether gold ever makes sense, or whether it wouldn’t make sense to buy other hard assets like land or even Coca-Cola. But gold has been a currency for ages, and it’s not surprising to see it take off when other currencies are perceived to be manipulated.

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