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.


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).


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.


Charitable Discount Rates

Alternatively titled: It’s my charity, and I want it now!

Robert Wilbin at OvercomingBias recently wrote a short post arguing that when evaluating charitable options, we should apply discounts to costs and we should not apply discounts to benefits. This topic makes me uncomfortable, but I’d like to make three quick observations that might be helpful to the charitably-minded. [Edit: It appears as though the article has moved to Giving What We Can.]

First, people have a preference for helping others sooner rather than later. All else held equal, I would rather help a stranger today than a stranger a year from now. Assuming there’s countless children who constantly need saving, I’d rather save a million children now than a million and one different children a year from now. I suspect that’s the way the charitable feel, and I don’t think any amount of writing will change that. I treat preferences such as these as exogenous features to be maximized rather than parameters to be changed.

Robert acknowledges this point. He writes that:

Time preference appears similar to arbitrary prejudices regarding whose interests count that are generally rejected today, such as racism and sexism.

I’m uncomfortable with any reasoning of the form: “All good people admit that Y is bad. Y is like X. Therefore, X is bad.” Having a preference for your family is like racism. Most people like for their family to do well. Does that mean familial affection is bad or that racism is good? I reject both conclusions and instead reject making moral judgments based on surface similarities.

People will prefer charitable schemes that save lives now instead of later. If you want to produce a cost-benefit analysis useful to people, then you should take that preference into account.

Second, if you believe in the “pay it forward” principle, good deeds will multiply. The returns will not be realized by you, but that’s why it’s called charity instead of business. To make this warm and fuzzy concept more real, imagine you save a child from starving and he grows up to become a fisherman who keeps other children from starving.

Finally, I believe this conclusion will lead people to never give to charities. If a charitable fund can either donate $100 now or invest the money and donate $100*(1+g) in a year, they’ll always take the latter if they do not discount the benefits of charity. By recursion, this leads to a conclusion that is ridiculous to humans.