The Aura of Aurum
Wrote the following as a reply to a pitch for GLD, the StreetTracks gold bullion ETF.
Demand for gold is not created simply by population growth. If 100 million severely impoverished people are born in sub-Saharan Africa, world gold demand will not change at all. Those people have 0 demand for gold; their demands, that they will labor to satisfy, are for clean water and enough protein so that they do not immediately die. Likewise the percentage of people worldwide who demand gold is small - but it is increasing as the global middle class increases. A lot of people are speaking about demand for gold in India - where it is used as part of weddings in a way that is almost religious (i.e. irrational), and in China, where it is being hoarded by an emerging middle class.
As a kid I read all the 'gold bug' newsletters - C.V. Myers, anyone? - and read a lot about how gold was a great inflation hedge. But historically it has not been a great inflation hedge, because supplies and demand over time have been artificially controlled. (Russia's dumping on the market of nearly all the ex-U.S.S.R.'s gold reserves in the 90's and early 00's kept the price far lower than it otherwise would have been.)
In long terms - decades or centuries, - I think the unmodified noun "inflation" should be banned from the discussion. Currency calculators are a joke; not even a troy tonne of gold could buy you a dose of penicillin in 1907 if you had pneumonia. In shorter terms it is useful to talk about the dollar's decline "against" something, or inflation "measured against" some other thing. For the last few decades global demand for gold was centered in the U.S. and therefore decline in the dollar against other currencies was not wholly reflected in the gold price. It is because this situation may be changing - *along with a decline in the dollar* - that I think gold is now a decent short term inflation hedge. (If the decline in the dollar doesn't continue, and I think that's possible though unlikely, gold may not be as good an investment in U.S. dollar terms.)
I will try an experiment in this last paragraph of this blog entry: I will mention Ron Paul, to see if maybe that will make certain CAPS players feel like they don't need to post an irrelevant comment about him. :D