The ‘Gold as Inflation Hedge’ Canard

On the one hand you have the sons of Harvey & Erb, who called gold to $800/oz. and caused a stir in the gold “community”. Per Campbell Harvey in this video with Kitco’s Daniella (dig the flowing golden locks of hair)…

“Gold is just too volatile” to be an effective inflation hedge.

Well yes sir, you are right. Gold does not track inflation in any kind of a convenient time frame. Gold’s volatility is a reflection of the volatility of the assets orbiting around it in the constellation of risk.

This cool NASA illustration makes the point. Those planets – like equities, commodities and the various FrankenVestments concocted by Wall Street – are in motion. All is often fine, but when a meteor of risk discovery hits one of them well, it is suddenly marked down vs. gold. See?

In another metaphor, gold has no price objectives or risk on its own. Gold is an anchor in the seabed. Its perceived volatility is based on whether the waters above (risk assets) are calm or choppy. Calm seas will surely impair gold’s assigned value (price) and rough waters will mark up that value as the herd seeks… calm.

Enough with the Harvey & Erb “Golden Dilemma” that caused such an uproar among gold bugs. Although over the very long-term gold certainly has protected against inflation, its volatility along the way is driven by other forces. The ‘inflation protection’ argument is mental masturbation that could only be concocted by academics. They are speaking to a segment of the gold “community”(the inflationists) that has its own analysis wrong. In other words, the whole debate was a waste of time to begin with.

The Armageddon Pitch

On the other hand, we have the usual suspects, as noted in a couple of recent posts, always taking things too far in the other direction. If you thought gold to $5,000 might be a bit of a stretch in your lifetime well sir, why don’t you just reevaluate and plan on six figures per ounce?