Tuesday, September 27, 2011

Which Makes a Better Investment: Gold or Canned Soup?


A bowl of soup by flicker user Kat Johnston / Sanura Sakai
Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here's Friday's query:
Name: Charles Meyrick
Making Sense
Question: What good is gold? In your article on John Williams, you mention that he thinks gold is the best bet around. But if we are talking about economic collapse brought on by hyperinflation and the government being unable to meet its obligations, what does owning gold do for a person? You can't eat it, live in it, use it for transportation...If John Williams is really that worried about the future, shouldn't he be advising his customers to buy canned food?
Paul Solman: Oh, I imagine John has a fair trove of canned food around somewhere, as do I. (In the interest of full disclosure, mainly in the form of Progresso soup.) That's because you never know what form a Black Swan might take in the short run. As to the longer run, gold bugs like Williams are betting that, in a hyperinflationary environment, the metal will retain its trading value and will thus replace paper money as the medium of exchange, a role it has played so durably throughout history. Is that really nuts, as you suggest?
On the other hand, the price of gold, in dollars, has been plunging the past few days. As the world's investors fret over the fate of Europe and the world economy, they have flocked to the U.S. dollar. That means buying dollar-denominated securities like bonds. That increases the demand for dollars, which drives up the dollar's price, all else equal. As the price of the dollar rises, the price of anything priced in dollars goes down. (Again, all else equal.) That's presumably one reason gold, priced in dollars, has been melting.
Another presumed reason: as already explained, gold is the ultimate hedge against future inflation. But if you begin to expect DEflation -- a diminution of economic activity and thus a drop in prices -- gold is one heck of a lousy investment, Mr. Myrick, just as you suggest.
Photo of a bowl of split pea and ham soup by flicker user Kat Johnston / Sanura Sakai.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions.

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