The Everything Hedge

It’s difficult to find a coherent discussion about the role of gold in the international monetary system.

On the one hand, there is elite opinion represented by central bankers, finance ministers, mainstream economists and the financial media who consider gold to be a “barbarous relic” (a term attributed to John Maynard Keynes that he actually never used as applied to gold). The elite nomenklatura say that there’s not enough gold to support the economy (untrue, there’s plenty of gold; you just have to adjust the price), that the money supply cannot expand if it’s based on gold (untrue; in the Great Depression 1929-1933, the money supply could have more than doubled within the legal limit which was a Fed problem, not a gold problem), and that gold is just a shiny metal (it is shiny, but it’s not just another metal. It has inspired confidence as a form of money since the dawn of civilization).

On the other hand, we have gold bugs who want a fixed one-for-one gold standard. Be careful what you wish for. With a strict gold standard, investors will never be able to make money on gold.

As things stand today, investors can go on a personal gold standard by buying as much or as little gold as they like at the market price. Is there anything reasonable between the elite condescension and the gold bug rigidity? This article by Financial Times journalist Rana Foroohar offers a highly intelligent and useful overview.

She begins with an obvious but important observation that gold is an excellent hedge against inflation. Recent data shows that inflation is not under control as the Fed has claimed but is actually going up. Gold will preserve wealth in that environment. Then she goes on to point out (as we have done recently) that gold is not just an inflation hedge but is what we call the everything hedge.

Gold hedges against geopolitical risk, macroeconomic risk, and other uncertainties in a volatile environment. Gold is also a hedge against the weaponization of the dollar, including hare-brained schemes to steal $300 billion of Russian-owned U.S. Treasury securities (see article 1 above). If the U.S. steals those securities (which it is currently planning to do), there’s no reason to believe that German, Italian, or Japanese securities are any safer.

At that point, the only safe place for national reserve positions in countries such as China, Saudi Arabia, Taiwan, Brazil, and many others is gold.

Gold is not a one-trick pony. It hedges against a long list of threats. This article does a great job of laying out the case.

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