what to buy if inflation returns
- Thread starter billyjoerob
- Start date
Quote from peilthetraveler:
My friend, do you see now how indoctrinated you are that US dollars are real money and gold is not? It's the complete opposite.
Let me try to unindoctrinate you.I have gold, you are hungry and have no food, but you have a car. I give you half an oz of gold for your car. You take that half an oz of gold and go to the farmer and give it to him for a decent amount of food. The farmer wants gold because of the inflation. He will not take the US dollars because he knows they will be worth less next week while the gold will hold its value against his crops.
You're making the case for gold as a currency. Fine. But the question was about investments. For most people, the amount of wealth stored in currency is very small. The vast majority of wealth is in cars, real estate, small businesses, etc. Income producing assets. Very little is in currency. So if you want to make the case for gold as a currency, I wouldn't disagree. If you want to argue for gold as an investment, I disagree.
Let's compare a small business - a restaurant - with gold. I invest in my nephew's small business in exchange for 20% of the income. Due to pricing power, the income at least tracks the CPI. Gold, on the other hand, generates no income. I have to sell off a little each day to pay my daily expenses. Each day I'm a little poorer. Each day the restaurant gets a little bigger, adds a new shift, turnover increases. That's an investment. Gold is a speculation and a currency or store of value, not an investment.
90% of businesses fail in the first 5 years. Thats a 90% chance to lose 100% of your money. There is no evidence your nephews small business is going to grow.
If there is massive inflation, less people are going to eat out which means more peoples businesses will fail. Businesses do not thrive in high inflation. They die. If you need that income to pay your daily bills, you've already lost.
The question was not about investments...the title of the thread is "what to buy if inflation returns."
So there were no cars or employers in 1912 when we were using gold for money? I wonder how woolworth and coca-cola survived with no employees those first 30 years in business. Hmmm.
The real question of the thread was, what businesses and investments thrive during inflation? I suggested a few in the OP. Gold is a speculation. It may or may not do well during inflation for the reasons I stated. How do you explain the last ten years of gold appreciation during a deflationary period as the ten-year trades below the Mendoza line?
I mentioned that gold is a speculation, not an investment. Jamie Dimon when he was on Capitol hill was asked the difference between gambling and investing. He said that in investing, the bank is the house. This is not correct. The lender does not win only if the borrower loses. Speculating and gambling are zero sum activities. Wealth is redistributed, not created. The pot does not get larger unless somebody puts more money in. Gold is not an investment, it is a store of value. No value is created by "investing in" ie buying gold. Likewise commodities are not investments, they are factors of production. No value is created when the price of oil goes up. Commodity speculators are not investors, in other words they are not engaged in productive activities. It is important for commodity markets to be liquid but every futures trade has a winner and a loser.
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The funny thing is that "fiat money" has done a good job of maintaining the price level. Inflation is so low these days as to be almost undetectable. A gallon of milk has been $3 for as long as I remember. This says a full gallon is ~$3.50, but I can buy a gallon for $2,99 at Target no problem, and I live in an expensive area.
http://data.bls.gov/cgi-bin/surveymost
Unfortunately or fortunately, the stable price level is combined with very wide swings in asset prices and the dollar exchange rate. Gold would stop those swings, but only to the detriment of domestic price stability. Ie, with a gold standard, the prices of ordinary items like milk would depend on the price of gold - does that sound like a good idea?
1970 we went off the gold standard. Gold was $35 per oz and the dow jones was around 1,000. So lets say you bought $1,000 in the dow and I bought $1,000 in gold (thats 28.5 oz of gold) Today, you have $13,000 and I have $46,000. The Dow are the biggest and best companies in the world, and I outperformed you by well over 300%. But you know what...if gold was only $500 per oz...I STILL would've outperformed you even if use Oct 2007 when the dow was at its highest point EVER!
What deflation are you talking about? What is cheaper today than it was 10 years ago besides houses in certain parts of the country? Food isnt cheaper. Gas isnt cheaper. Cars are not cheaper. Goods are not cheaper. I'm just not sure what deflation you are talking about. I only see inflation.
The answer to the price of milk has to do with supply & demand. In 1999 the production of milk in the US was around 70 million tonnes. In 2010 the production was 87 million tonnes. Thats almost a 25% increase in production, yet the population only grew about 10% in the same time period. So what happens when you have more supply than demand? The price goes down (or stays the same). Now if milk production only increased 10% instead of 25%, I think we would be seeing much higher milk prices today.