Gold price and Inflation?

D

dominover

I’m trying to understand how Gold is a good inflation hedge. Here’s why.
If Gold is priced in USD and inflation in the US erodes the purchasing power of the USD, then surely if Gold is priced in USD then wouldn’t gold be cheaper to buy?

For example, if the Gold Price is $100 and inflation increases in the US, $100 is still $100 if the price of Gold remains the same. So purchasing Gold at the price that it was ($100 US) would still cost the same.

I’m just not sure I understand the argument that because real purchasing power of the USD is eroded during periods of inflation then it takes more USD to buy gold. It would be the same amount of USD if the Gold price remained the same at $100 wouldn’t it?

I’m clearly missing a fundamental point there. Can someone explain it to me?
Thanks
 
Just to clarify. Are you saying that Gold is valued only off the inflation adjusted value of the US Dollar?

If not, then why did the gold price increase?
 
There is still demand and supply with gold....if people aren't buying it then it goes down... It's still a commodity....it's just more finite then our fiat currency.... But over time the more dollars printed the more prices go up in general and this is what you will see across the board after the lack of demand for commodities goes back up when people go back to work.....gold and inflation aren't a strict linear relationship
 
dominover said:
Just to clarify. Are you saying that Gold is valued only off the inflation adjusted value of the US Dollar?

If not, then why did the gold price increase?
More...
Good is valued at whatever supply and demand values it at, same as any other commodity. There's no "rule" dictating it's price. @SanMiguel was just pointing out that those who think gold is an inflation hedge think it will behave in that manner which is why they buy it. But there's no assurances it actually will behave in that way, and history shows gold prices randomly climbing and diving at times when there is little change in inflation.
 
$1000 in SnP500 for 50 years :
(inflation in theory 2%, thus Interest Rate would be 8%, an avarage as investopedia.com points out)
1.PNG

Now gold for 50 years :

2.PNG

3.PNG


By buying $1000 worth of gold, 50 years ago, today you would have, roughly : $6 000



$18 000 returns from equities.
vs
$6 000 returns from gold



It's a fairy tale, to create non-fundamental - speculation based demand.

So much of the hedge against inflation.
 
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dominover said:
I’m trying to understand how Gold is a good inflation hedge. Here’s why.
If Gold is priced in USD and inflation in the US erodes the purchasing power of the USD, then surely if Gold is priced in USD then wouldn’t gold be cheaper to buy?

For example, if the Gold Price is $100 and inflation increases in the US, $100 is still $100 if the price of Gold remains the same. So purchasing Gold at the price that it was ($100 US) would still cost the same.

I’m just not sure I understand the argument that because real purchasing power of the USD is eroded during periods of inflation then it takes more USD to buy gold. It would be the same amount of USD if the Gold price remained the same at $100 wouldn’t it?

I’m clearly missing a fundamental point there. Can someone explain it to me?
Thanks
More...

You can sell gold anywhere in the world and be paid in the relevant currency for the weight of the product. I have sold gold sovereigns in the United Kingdom for pound sterling, the transaction had nothing to do with the American dollar or the dollar price at all.
 
This still doesn't address the question.
The explanation defined in textbooks and around the web is that ad Inflation erodes the purchasing power of the USD, then it takes more USD to buy gold. That doesn't make sense.

However. If you ate buying Gold from another party, they might not want to sell it to you with a loss. Instead they sell it to you at a price that covers them for their loss of purchasing power and thus they demand more dollars or pounds to cover themselves.

I suppose then, the question is, why Gold. I know it's accepted ad an inflation hedge, but why? Why not something else?
 
The problem is it's not "accepted" as an inflation hedge. Some folks would like it to be, history shows it's poorly corelated and math shows correlation does not equal causation. Gold people tend toward irrationally and paranoia, or more likely gold attracts those kind of people. Either way, take what they say with a massive grain of salt. If what they're saying doesn't make sense then this is one case where it's probably because they simply aren't talking sense and you've managed to see that through some basic logic that they're missing.
 
dominover said:
This still doesn't address the question.
The explanation defined in textbooks and around the web is that ad Inflation erodes the purchasing power of the USD, then it takes more USD to buy gold. That doesn't make sense.

However. If you ate buying Gold from another party, they might not want to sell it to you with a loss. Instead they sell it to you at a price that covers them for their loss of purchasing power and thus they demand more dollars or pounds to cover themselves.

I suppose then, the question is, why Gold. I know it's accepted ad an inflation hedge, but why? Why not something else?
More...

Gold is finite and in limited supply so it has a value due to its scarcity. This gives the commodity a value due to how difficult it is to get hold of. In relation to gold's value against currency, usually when there is inflation it is considered to be due to an excess of money supply although it can be due to a shortage of goods. This suspected increase in the money supply can make the value of scarce commodities greater because there is no risk of an increase in supply for it which could lower its price or purchasing value. With finite commodities the risk is its value derives from the immediate demand for it at the time, which can fluctuate. However usually when there is inflation the fact that the commodity cannot be produced in greater quantity or at least at a slow rate of mining gives it an attractive incentive for investors to buy it.
 
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