Sunday, October 2, 2011

The real reason you need gold – it's insurance

Adam Fergusson, author of When Money Dies - the only place to turn if you want to know about how hyperinflation ruins societies - is much in demand as a speaker these days.

Hedge funds and economic institutions around the world all want him to visit to tell them how our own inflation debacle might unfold. Sometimes he obliges. When he does, he usually tells them that he expects the sovereign debt problem in the West to be dealt with via high double-digit inflation for some years to come. He doesn't tell them he expects hyperinflation.

Then again, as he says, defining hyperinflation is really a matter of the timing. The pound and the dollar have both lost 90% of their value in a matter of decades. If they'd done so in a year we wouldn't call it currency stability (as our leaders have long encouraged us to do). We'd call it hyperinflation.

We talked about gold: how much those of us concerned about the long-term (and these days short-term) debasement of currencies should hold, and whether one should buy more or not.

My view on this is pretty clear. I don't see gold as an investment and I don't see it as speculation. I see it as insurance. Mostly we shouldn't hope for the gold price to go up. We should hope that everything works out just fine and it goes down.

Think of owning gold in the same way you think of home insurance. You always have it just in case, but you really really don't want to end up claiming on it. If you own a house in the middle of a nice safe area you expect to pay a low premium. If you live on the edge of a forest prone to summer fires you expect to pay more. And if you try and take out insurance after a nasty fire has started heading towards your porch you'd expect to pay a huge amount more. But you'd still prefer it if your house didn't actually get burnt to the ground.

Same with gold. It costs more now than it did five years ago. But that's because we have a) noticed the nasty macroeconomic fire headed our way and b) failed to figure out how to deal with it. When the danger rises, so does the cost of insurance.

So should you buy gold today? That depends on whether you think that the world's central bankers and politicians can somehow get themselves – and us – out of the macro economic nightmare they are engulfed in. If you don't, best get some insurance against their failure.

Fergusson tells me, by the way, that he thinks that they aren't doing so well so far – and that he might start mentioning the slight possibility of hyperinflation in his talks.

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