Gold Is a Hedge Against Bad Government Decisions
Most investors think the precious metal protects against faster inflation or a plunge in stocks. Not so.
Gold is misunderstood as an investment.
Photographer: Keystone/Hulton Archive/Getty Images
Investors don’t really have a handle on what gold is or what it represents. Many erroneously believe gold is some sort of inflation hedge, because of our experience in the 1970s. It’s also not a hedge against stock market crashes, as we discovered in March. Gold is a hedge on government authorities making poor economic choices. Inflation is usually the result of those poor decisions, but people confuse cause and effect here. Gold is a hedge on policy makers screwing up, and there has been a lot of screwing up in the last 20 years.
Gold has significantly outperformed stocks this century, gaining about 555% versus 79% for the MSCI All-Country World Index of stocks and 146% for the S&P 500 Index.1 This is a direct result of significantly looser financial conditions, and no constraints on monetary and fiscal policy. From a financial perspective, the global economy is in a much worse place than 20 years ago, and there is no evidence that things are going to improve.