Vestal Chamberlain Lubriderm wrote:
Timelordwho wrote:
Gold is a commodity, and like all commodities is a high risk volatile asset that hedges against inflation.
Yeah, what's that in English? I'm pretty sure that gold has lost value in constant dollars since 1980, so I'm not seeing how it's much of a hedge against anything, in the long term.
Correct. Commodities hedge against rapid inflation, and gold sort of acts like money. If a money supply increases, the value of money goes down, so the price of goods, and most acutely, raw goods, go up in relation to the value of money. Their actual value doesn't change, just the number. Gold is especially prone to this effect because many people treat it as a money analog, and so it changes in value with respect to the perceived future value of money, or what the inflation rate is.
A simple example being you have $200. You buy 1 gold bar worth $100. The government prints a ton of money, so their is now double the money in circulation. Your gold bar is now worth $200. you can sell it and have $300. The money you put in gold has been 'protected' from dropping in real world worth in the way that your dollars have. In fact, your gold bar may be selling for $300-400 because people are afraid the government will print more money and thus devalue it's worth further.
The effect works in reverse for deflation.
Commodities are also high risk because their value fluctuate wildly.