“Because gold is honest money it is disliked by dishonest men.”
- Ron Paul
Buying physical gold is a time-proven method of securing generational wealth, and a security measure often taken in times of economic turbulence. Gold investing has long been viewed as a hedge against inflation and a store of value against currencies. Throughout history, as coins and currency became debased, those who had more precious metals on-hand had many more options for purchasing what was needed and investing.
Investing in a gold currency, as economist F.A. Hayek suggested, also acts as competition to paper currency and any attempted coercive monopoly of currencies. When currencies are strictly controlled, the power of government is buttressed. Hayek specified, “[Monopoly of currency] has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power.”
According to Investopedia, currency debasement is intentionally lowering the currency's value through various monetary and fiscal methods. In the past, debasement was associated with substituting precious metals with base metals such as using less gold or silver in the coins and replacing it with copper or nickel, while keeping the face value the same. Today, debasement primarily occurs by printing more money in the form of fiat currency, a process known as monetary inflation.
The reason governments typically initiate currency debasement is to extend government spending and purchasing power. Still, it comes at the expense of citizens who are eventually stuck with less wealth, higher costs, and lowered purchasing power. Currency debasement, as well as monetary inflation in general, tends toward price inflation. Simply put, currency debasement in the form of monetary inflation is legalized counterfeit.
Since the US began removing itself from the gold standard in 1933—and eventually removing that gold backing altogether in 1971—the value of the dollar has fallen significantly when compared to an ounce of gold. As of 2023, the value of US currency is being challenged as the dollar is slowly debased. The purchasing power of a dollar in 1913 would be worth around $30.22; a dollar in 1933 would be worth around $23; a dollar in 1970 would be worth $7.71; and, a dollar in 2003 would be worth $1.63.
How Does Gold Hedge Against Inflation?
Gold is a commodity valued and traded internationally. Gold is valued for many reasons including its aesthetic appreciation, limited supply, durability, imperishability, popularity, and industrial uses. Due to these reasons and more, gold has maintained its overall value throughout the millennia. When one country’s currency begins to slip or falter, gold is likely the best-shared commodity to transfer wealth between currencies of other countries while maintaining a greater appeal for investment. Especially so when some countries’ currencies are not accepted everywhere due to political conflict or discrepancies.
By measuring the rate of inflation, InflationTool demonstrates that from 1971 to 2023, the average inflation rate for the US dollar has been 3.93%, while the cumulative inflation rate has been a whopping 641.44%. In layperson's terms, this means $100 in 1971 is now equivalent to$741.44, which represents a significant decrease in purchasing power.
As George Mason University professor of economics Lawrence White, states, “The inflation rate was only 0.1 percent over Britain’s 93 years on the classical gold standard. It was only 0.01 percent in the United States between gold resumption in 1879 and 1913.” Yet, because of failures of monetary policies by the Federal Reserve, and fiscal policies by Congress, the inflation rate today is much higher pushing above 6 percent with an average inflation rate from 1960 to 2023 averaging close to 5 percent.
Is Gold Volatile?
Some economists, especially those with socialist and centralized planning tendencies, will suggest that gold prices are volatile. Their statements misrepresent gold as though the ‘volatility’ means gold is not as price sustainable as the dollar. Contrary to their sentiments, the price of gold is only considered volatile when compared to a currency such as the US dollar in relatively short terms. When gold is looked at through a lens of global values throughout the course of history, beyond a single currency, we see that it has maintained significant value, and when currencies fail it is gold that has helped people regain wealth. Comparing the global value of gold to the dollar, we see that the value of gold has remained intact overall.
In the US, gold in 1913 was $20.67; in 1933, it was around $32.32; in 1970, it was $38.90; in 2003 it was $417.25; and today, it is around $1800. According to Statista, from 1971 to 2022, gold had a return of 7.78 percent per year in USD terms.
Although the US government has continued to artificially fix, change, and influence the price of gold, the value of gold has remained superior to the dollar overall. This further indicates that gold is still a good hedge against inflation. Gold has outpaced inflation in the US in the long term, indicating that gold is not as volatile as the dollar in the long term.
Can Investing in Gold Improve the Dollar?
The fiat dollar of the US is what allows politicians, in conjunction with the Treasury and Federal Reserve, to arbitrarily print more dollars in order to fund nearly-endless wars, inflated welfare programs, and to deliver uncapped foreign aid. More printing of dollars tends to decrease the value of the other dollars in circulation, and this can lead to price inflation. Fiat simultaneously acts as a form of indirect slavery and secondhand theft once those dollars are spent, the same way counterfeiting does. If the dollar does not return to a gold standard to create a natural market-agreed value of the dollar with a more restricted supply, the dollar will likely continue to weaken as the incentives for these government programs and handouts are greater than the immediately perceived costs.
Even if the dollar does not return to a gold standard, having a significantly increasing number of people investing heavily in gold as opposed to treasury bonds, money market accounts, CDs, stocks, and the like, creates shifts in the incentives encouraging and pressuring other people to join in on the more sound investment of gold. The market sees the long-term stability and gains of those that do invest in gold, and people naturally tend to want to have the best return on investment. Gold is not a cure-all for inflation and deflation, rather it is a more stable long-term option than fiat.
Investing in gold and currencies that hold their value creates a challenge for the government's monopoly over currency and its exploitation of that monopoly. Or, as Hayek said, “Just as the absence of competition has prevented the monopolist supplier of money from being subject to a salutary discipline, the power over money has also relieved governments of the necessity to keep their expenditure within their revenue.”