Gold’s near 4% decline today should serve as a reminder to investors that although gold may help defend a portfolio against a weakening currency, that certainly doesn’t mean it can’t trade with significant volatility. Below is a chart showing the days since 2009 that Gold has declined by 2.5% or more. There have been 18 such days over that timeframe.
To the extent that investing is about matching one’s future stream of liabilities (i.e. purchasing needs), Gold investors should be aware that they are actually taking a huge risk relative to their liabilities stream. That’s because aside from the bitcoiners out there who are planning to make all their future purchases in Satoshies, the rest of Americans are likely to continue making future purchases in dollars. It’s reasonable to take the view that these dollars will lose value over time (they always have) but owning gold is a highly concentrated bet on this idea.
When you invest in Gold you effectively disconnect yourself completely from the value of the dollar, which means that if you’re pricing Gold in dollars ($1500 per ounce) the value of the asset as expressed in dollars is likely to be highly variable. All asset prices consist of two core components: 1) its value in relation to the unit of measurement (currency) and 2) its intrinsic hedonic/economic value. By owning gold or any foreign assets for that matter the investor is implicitly taking risk on both fronts. So it would follow that the ride could be a bumpy one.
By contrast a difference between owning Gold and a share of equity is that as long as US companies still conduct business in US dollars, an investor is at least still invested in an asset generating value that is somewhat attached to the value of the dollar and therefore not straying too far from their liabilities stream. The upside is that even in the worst case scenario that global fiat regimes totally fall apart, there is nothing to say that Walmart can’t start doing business in Satoshies, Globals, or whatever other currency takes its place.