All that Glitters is not an Inflation Hedge

As you probably know, gold has undergone a precipitous drop lately. Less than a month ago, it opened at $1,613.75 per Troy ounce. Today it opened at $1,380 per Troy ounce, a 15 percent decrease.

That’s a big decrease, but there’s a lot further it could fall.

gold

There’s no way I can speculate on what the price will be in the future. Buying gold now might end up being a great idea, or it might end up being a terrible idea. However, I would like to address a remarkably common misconception: that gold is an inflation hedge.

Buying gold because you think it will protect you from inflation is absolutely a terrible idea. Here’s the graph from above adjusted for inflation (through the GDP Implicit Price Deflator, last updated October 2012).

goldadj

If gold were a good inflation hedge, we’d expect the line to be relatively flat, or maybe steadily increasing.

Instead, the price occasionally has large spikes during times that are perceived as crises. Gold is a hedge against panic, and when panic subsides, so does gold.

With that thought in mind, I hope gold continues to fall in price.