Almost Everything Is Protected Against Inflation

This picture taken on December 11, 2012 shows Chinese sales staff walking along an aisle paved with 300 kilograms of gold bars, estimated to worth over 100 million yuan (USD16 million) to promote a gold exchange house in Kunming, southwest China’s Yunnan province.

Photo by STR/AFP/Getty Images

The ad-targeting demons sent me a bunch of ads today about how I should buy gold to hedge against inflation. And apparently some highly paid hedge fund managers are thinking along the same lines, with Paulson & Co. “gold strategist” John Reade telling investors that “We expect the strengthening of the economy and stock market to cause money supply to rise more than real growth and eventually lead to inflation. It is this expectation of paper currency debasement which makes gold an attractive long-term investment for us.”


I don’t think that inflation prediction is correct, but what really doesn’t make sense here is the logic that leads from an increase in the inflation rate to the desirability of investing in gold. It is true, of course, that if inflation accelerates from 2 percent to 5 percent that this will (ceteris paribus) cause the nominal price of gold to rise. But it will cause the nominal price of everything else to rise too. That’s what inflation is! You could just as well invest in oil or timber or land (houses) or stock or New Zealand government bonds or whatever else. The vast majority of asset classes are protected against inflation. Now there are some exceptions. If you think there’s going to be a lot of inflation over the next five or ten years, you don’t want long-term nominally specified debt. A 20-year Treasury bond is yielding 2.54% interest right now, which is going to turn into a disaster if we average 5 percent inflation for the next twenty years. But they sell inflation-indexed bonds specifically for this purpose.

Buy gold if you want. Just be aware that a decision to buy gold is just like a decision to buy any other commodity—copper or tin or land in Chicago or whatever—and should be backed up by some specific thinking about why the price of gold will outpace the price of other stuff. A general theory about inflation should push you out of certain specific kinds of long-term debt instruments but is neither here nor there as far as any specific alternative.