Part 1, by Palos Verdes Coin Exchange
A “Hedge Against Inflation:” A Gold Bullion Beginner’s Guide
You’ll often hear that gold is a great “hedge against inflation.” But what does that mean? As governments and their banks around the world run out of money, they just have to print more. In doing so, they increase the supply of their currency. Eventually, if demand doesn’t catch up, that means their currency is worth less. In that way, what $1 buys today may take $1.10 to buy tomorrow. The item isn’t worth more, but the currency is worth less. That’s inflation.
Think about gasoline prices. Last year (2021) on a specific day gas cost $4.50 here in Palos Verdes, CA. But this year, the same gallon of the same quality gasoline costs $6.50. There isn’t more demand or significantly less supply, but because of the way global markets react, it now costs more. To look at that another way, if you wanted to sell a gallon of gas, you could get more money for it now. That means relative to the price of gasoline, the value of the currency is less than it was a year ago.
The cost of gasoline is built into everything we do. All goods that need transport cost more because those goods’ transportation costs are higher because of the cost of gasoline. In that way, the dollar is seemingly worth less.
To battle this effect, to battle inflation, you could buy gold. The cost of gold may go up or down relative to the dollar, but it doesn’t normally rise or lessen in cost as much when compared to other in-demand goods and services. So if the cost of an ounce of gold is less today, it’s because the dollar is stronger, or worth more. Conversely, if the cost of gold is more today, that is a reaction to a weakening dollar that is worth less. Demand for gold remains relatively consistent, whereas demand for the dollar is defined by outside factors. So when investors talk about gold being a “hedge against inflation”, they’re talking about protecting the cash value of their investment or monetary holdings.
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