Gold not an Inflation hedge
The historic tendency for gold to rally in value during deflations is not appreciated in part, because most investors wrongly assume that gold is primarily a hedge against inflation. The record here is clear, but apparently over-looked. It was documented in a thorough study, The Golden Constant: The English and American Experience, 1560-1976, by Professor Roy W. Jastram. Here, in Jastram's words, is a summary of his findings:
" The evidence drawn from the English experience for 400 years is clear. Gold is no hedge against inflation of a prolonged character. Even worse, it/lost/operational wealth (purchasing power) consistently and seriously in each inflationary episode.... From 1897-1920, a person would have lost two-thirds of his operational wealth just by holding gold in bars from the beginning to end. And this was in the golden age of the gold standard."
What about deflation? Jastram continues:
"Four pronounced price deflations took place in the four centuries recorded, with the three most severe occurring since 1800. In all four price recessions operational wealth in the form of gold appreciated handsomely. When one sees that just by holding gold for 13 years from 1920 to 1933, operational wealth would have increased 2 1/2 times, one realizes that gold can be a valuable hedge in deflation, however poor in inflation." |
