Gold Investing: Protection Against Inflation

People don’t realize it, but these macro economic issues have real, personal consequences, said our French MoneyWeek editor. Simone calculated that keeping the debt under control, at 2009 levels, would cost the average Greek nearly $2,500 per year. That’s just the cost, per capita, of keeping up with the interest, while holding other expenses even with government revenues.

Not many Greeks want to pay that amount. Not many will be able to. And more than a few will think they’re being treated like chumps. They’ll imagine that it’s all a conspiracy of the elites…or some kind of fraud on the part of the governing classes.

And they’ll be right!

The ruling classes want to keep everything under control. Like governing elites everywhere, they want to prevent change – at all costs. So, they prop up the old industries…reward the bad banks…and protect failed companies and bad speculators. Why? They’re on the top of the heap…and they want to stay there.

They own the present. The future be damned!

So, what’s their strategy? It’s to squeeze the working classes and the middle classes…and everybody else. Anything and everything to preserve the old order.

Scrape the barnacles from the hull? Not a chance. They are the barnacles!

But the big news yesterday was the price of gold. It appears to us that gold may now be getting ready to prepare to commence the beginning of its final stage. You will notice that there is more fudging in that last sentence than in a birthday cake.

Why? Because even if we are right about the general flow of events, it is almost impossible to get the timing right.

Still, you gotta guess. And our guess is that gold is beginning to move up – on good news AND bad news. Inflationary? Deflation? It doesn’t seem to matter. Gold is beginning to act more and more like real money, not just like a speculation.

When inflation increases what do you want? Well, real money…something that maintains your purchasing power even as the paper currency goes down. Traditionally, that’s gold. Because they can’t make more of it easily.

Gold is not perfect money. But it’s the best thing we’ve got. And when consumer prices start to move up people look for ways to protect themselves. In the past, they could move to euros or to the dollar. Now, both the euro custodians and the dollar custodians have decided to sacrifice the integrity of their currencies in order to bailout bondholders. That leaves gold as the best choice for inflation protection.

What about deflation? In deflation, prices go down. But that means that the value of real money goes up. You can buy more with less money when you are in a deflationary cycle. Trouble is, in deflation, the backers of asset prices tend to go broke. You have a piece of paper. It says you own a share in a department store. Come a deflation and people stop buying – they’ll wait to see how low prices go before spending their money. So, the poor department store goes bust and you lose all your money.

Or, take a bond from a sovereign country, such as Greece or the USA. In deflation tax revenues go down too. This leaves the country unable to pay the interest on its bonds. It misses payments. The value of the bonds collapses.

What can you buy that has no one on the other side who might go broke? Gold! The yellow metal went up in the last great depression. It will go up in the next one too…


Bill Bonner
for The Daily Reckoning

The Daily Reckoning