Offshore Investment Guide | Expatriate Investments | Offshore Investing

Gold vs. Paper-Money Inflation

New gold is being found and mined today at the rate of some 2,600 tonnes per annum.

That's a modest increase of 1.6% per year to the above-ground supply. And critically for the value of gold, this annual growth-rate lies beyond the power of politicians or investment banks to increase.

The supply of Euros, in contrast — the most hawkishly-managed major world currency right now — is currently expanding by 11.5% per year.

Thanks to this tight supply, gold grew its purchasing power more than nine times over during the 1970s — the last worldwide surge in inflation. In terms of business assets, it rose 23 times over by the start of 1980 as measured against the Dow Jones Industrial Average.

During the financial collapse of the 1930s — but this time amid a deflation caused by half of all banks in the United States failing — gold bought 17 times as many financial assets as it did before the Great Crash of 1929.

Now debt defaults and inflation are working together today, forcing a fresh crisis in the value of money. Gold has already risen three-fold against the New York stock market since early 2000. It's recently turned higher in terms of residential and commercial real estate, too.

Time To Buy Gold?

Gold doesn't care whether a financial collapse destroys the value of money (inflation) or the value of debt (deflation). Its unique characteristics — indestructibility and tight supply — mean its owners can thrive amid either.

But that doesn't make gold a "forever" investment. Gold will always lose value during stable periods of strong economic growth.

Over the twenty years to 2000, for example, gold lost 95% of its value in terms of US real estate. So it's no surprise that, as a proportion of world investment portfolios, gold fell from around 2% to effectively zero.

The trend in gold prices finally turned higher at the start of this decade, just as Gordon Brown — now the British prime minister — sold half the UK's national gold reserves at less than $300 an ounce.

Since then gold has trebled and more. But this gain remains small in the context of previous gold trends. It's also been limited by Western governments persuading their citizens that "core" inflation in the cost of living is running at just 2% per year or below.

These official CPI figures, of course, exclude the cost of housing, mortgages, taxes, fuel and saving for retirement. But this trick cannot go un-noticed forever.

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