How to Understand the Value of Gold
Gold has been a hedge in the US gold market for some time. It was not really a hedge, but a valid argument against supply and demand. In other words, gold was a hedge against inflation. The supply of gold is limited by the ability of mines to extract the metal from the rock. When there are more gold mines than people willing to work for the gold to be extracted, and the supply far exceeds demand, inflation occurs. So gold protects investors from inflation.
Gold and Money
With the price of gold is increasing almost daily, more people are considering investing in gold as a hedge against inflation. After all, gold is a universal currency that does not suffer a depreciating value, like paper money. If we want to buy gold as a hedge, then we need to mine more gold than supply can provide. But gold does not have to be mined at huge expense into underground bunkers, or rickety shafts through which electricity is pumped.
There are many ways to invest in gold as a hedge. We can buy gold futures, for example, to protect our dollar investments from inflation, or we can buy physical gold bars. We can also exchange gold for other currencies if we feel like we need more of the good (not just the dollar, but the Euro, Japanese Yen, and Swiss franc) at a particular time.
Gold is a particularly good metal to protect yourself with because it is highly unlikely that you will be robbed by another person. Robbers love to target individuals that store large amounts of this metal. In fact, they would love to have your gold in stock, because it is quite difficult to sell. Also, you do not need to keep it in your house. You can park it anywhere you choose. This means you can travel with your cash and gold, without having to worry about theft.
When it comes to the value of gold, there are many arguments against the increased supply of this precious metal, because it will take its place, or be taken away from us, one day. The increase in supply is likely to take the form of higher prices so that we pay more for the metal. There is also the argument that gold is no longer made in the quantities that it was in ancient times, which is likely to reduce its value.
However, gold has proven time and again that it is a safe hedge, that is not subject to the volatility of stocks and bond prices. Gold is a commodity, just like water or oil, and as such can be easily manipulated by investors. Its value is tied to that of the dollar, so any rise in the dollar against other currencies is likely to immediately decrease the value of gold. This means that the US will benefit from an increased supply of gold, while the Asian economies lose out.