Don't Let The Glitter Hypnotize You

As fear grows of looming inflation, many are saying that gold is a great way to protect your wealth. Just ask Ayn Rand or Ron Paul. There are even commercials on TV now encouraging people to invest in gold - before it's too late! That's all rubbish.

One particularly strong proponent of buying gold is economic commentator Peter Schiff. He lays out the typical argument in his market outlook from his firm's website:

In a world in which fiat money-substitutes are continually debased by governments around the world, we believe that gold remains the most honest and accountable form of money. When financial uncertainty abounds, it becomes increasingly important to hold assets with value that cannot be diluted by government monetary policy. Gold has been chosen as a store of value and unit of exchange since the dawn of civilization due to its inherent properties: rarity, durability, fungibility, divisibility, and portability.

Ultimately, as the current crisis runs its course, the value of a gold-based monetary system may once again gain favor with productive nations looking to safeguard the value of their savings. In such a scenario, gold would spike in value as central banks became net-acquirers of gold, rather than net-sellers.

On what planet does anyone really believe that a gold-based monetary system could return to productive nations? That seems like wacko doomsday talk to me. It's hard to even begin to imagine the amount of gold that would be necessary for that to work. Do you really see nations - especially like China, Brazil and India, who are becoming increasingly important in the world economy - suddenly embracing a gold standard?

Then there are the economic consequences. If all currencies were pegged to gold, then you would no longer have floating exchange rates, which virtually every legitimate economist will tell you are essential to efficient international exchange.

The strongest criticism I see against buying gold, however, is that it's just another commodity. As a result, it's subject to market whims just like other commodities. A giant gold mine is discovered in Siberia? The value of gold decreases. A deep recession leads to people buying less jewelry? The value of gold decreases. Platinum becomes a stronger preference for wedding bands? The value of gold decreases. Gold, like every other commodity, cannot hide from supply and demand shocks in the market.

If you are worried about cash and want to invest in a commodity, then go for it. But why gold? Sure, it's shiny and pretty. But so are diamonds. And so is platinum. What makes gold so special? As far as I can see, just the rhetoric behind it.