I recently heard a podcast that included a short discussion of gold as a hedge for your purchasing power. This is nothing new for precious metal investors. Gold has held its value for thousands of years, and it still plays a key role in an economy that relies on fiat currency.
Gold is a hedge against both a drastic economic crash and a gradual decline. If there were a massive crash tomorrow and the dollar fell, gold would spike in dollar terms. But it would be stable against other currencies. It also serves as a hedge against a slower decline of the dollar. Remember, the national debt is still rising faster than the price of avocado toast.
Not only is gold a hedge against purchasing power, but it is also a hedge against monetary policy error.
The dollar is a fiat currency, not backed by anything. This allows the Federal Reserve to manipulate the economy by changing interest rates. It can raise or cut them. Even if you believe the Fed has the very best intentions, mistakes still happen. Policy errors still happen.
A quick glance through history shows us two truths:
- Human beings make errors. We make mistakes every single day. That’s not even counting those who have intentionally used manipulation to gain wealth and power. This includes individuals and governments. Errors happen, whether by design or by accident.
- For the first time in history, all major currencies are fiat. We are living in a great financial experiment. This means that we don’t have much history to base decisions on. Again, even if we use the best minds with the purest intentions, we are still making it up as we go along. We are in monetarily uncharted territory.
What do these two things mean when added together? Those making decisions have to stay on their toes because they cannot predict the future. They are typically reactive instead of proactive, and the danger of being reactive is overcorrection.
It's like slamming the brakes when you see a bump in the road—you avoid the bump but risk swerving off. Gold is the seat belt that keeps you steady in wild turns.
At the very least, honest mistakes will occur. At the very worst, conspiracy and collusion could be in the dollar’s driver’s seat. Policy error is bound to happen, and gold is a pretty good hedge against it.
