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Seeking Alpha: Why Gold, and Why Now

June 25, 2020
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Article by Jan Nieuwenhuijs in Seeking Alpha

Currently, gold is undervalued as there are massive bubbles in asset markets and central banks continue to print money, which supports these bubbles.

This is an unsustainable situation; and when the bubbles burst the gold price will rise.

Gold is the ultimate store of value, as it’s the only globally accepted financial asset without counterparty risk, and it has preserved its purchasing power throughout history. In the long-term, the stability of gold’s value is unparalleled.

Because gold is scarce and immutable, it has been used as money for thousands of years.

Since 1971, the world has been on a pure “paper money” standard. Although, bank notes are hardly used nowadays. Most of the time, what is used as money are digital book entries. Whether in paper or digital form, money issued by governments is commonly referred to as fiat money.

The Price of Gold Goes Up

Because fiat currencies can be created boundlessly, over time their value declines, and thus the price of gold denominated in fiat money goes up.

Although, the gold price doesn’t go up in a straight line, it has always “caught up.” Over time, the price of gold has always compensated for devaluing fiat currencies. Gold’s purchasing power has remained markedly stable in the long run.

Gold Preserves its Purchasing Power

Governments aim for stable prices of consumer goods. But with the seductive ability to “print” money, they always create too much. The printed currency loses value, and prices of consumer goods go up.

Because the gold price keeps up with prices of consumer goods, gold preserves its purchasing power. Since 1800 gold’s purchasing power in the U.S. has been remarkably stable.

This is the power of gold: it preserves personal as well as generational wealth.

Gold Keeps up With Other Financial Assets

Hedge Fund Manager Ray Dalio has compared storing value in gold versus government bills.

Dalio computed the annual returns in real terms, which is done by subtracting inflation from interest rates. The result over 100 years is that in major economies the average annual return of government bills was -0.2%, while gold’s return was 2.2%.

The poor result of the bills is because they are denominated in currencies that have been strongly debased since 1912. The U.S. dollar, for example, lost more than 98% of its value against gold over ...

To read this fascenating article in Seeking Alpha in its entirety and view the relating charts, click here.

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