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INFLATION HEDGE



Purchasing Power
Inflation Hedge
Risk Management
Demand and Supply
Investors around the world recognise gold as one of the most reliable hedges against inflation. Investors generally buy gold as a hedge or harbor against economic, political, investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest.

Inflation hedge is an investment with intrinsic value such as gold which is negatively correlated to both stocks and bonds. In other words, when stocks and bonds decline, the inflation hedge is likely to appreciate. The value of gold, in terms of the real goods and services it can buy, has remained largely stable for decades, if not centuries. Recent research from the World Gold Council shows that gold has held its value over the long term when compared with other commodities. Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold is produced primarily for accumulation; other commodities are produced primarily for consumption. Its value arises from its use and worldwide acceptance as a store of value, Gold is money.

Gold maintains its purchasing power throughout history. We've all heard the horror stories of Germany in the 1920's or Zimbabwe more recently; paper money lost value by the minute and prices were completely unpredictable. A loaf of bread today might be four times as expensive tomorrow. People in Germany burned cash to stay warm because it was cheaper than buying firewood. Gold cannot be printed by governments so its value cannot be watered down like paper currency which can be printed infinitely.

Hyperinflation means rapid, out-of-control inflation. The United States had a taste of high inflation in the 1970s. A basket of goods that cost $100 in 1970 soared to $212 in 1980, according to the Bureau of Labor Statistics. Gold has retained this purchasing power over even longer periods. It is thought that an ounce of gold bought 350 loaves in the time of Nebuchadnezzar, the king of Babylon who died in 562BC. An ounce of gold still buys roughly 350 ordinary sliced loaves today, showing that over 2,500 years gold has proved a very effective hedge against inflation, at least when it comes to everyday essentials.

The traditional remedy for inflation in general, and hyperinflation in particular, is gold. In periods of inflation or even when people just worried about inflation, people buy tangible assets, such as real estate, commodities or precious metals. In hyperinflationary periods, paper money is useless. People turn to barter, trading laundry services for, say, sheep. Because a sheep is a clumsy trade mechanism try getting one into a parking meter people often use gold as currency. Gold is portable and generally accepted as being valuable. When inflation soars, so does gold. A growing body of research supports gold's reputation as a protector of wealth against the ravages of inflation. Numerous economists have demonstrated that, over the long term, through both inflationary and deflationary periods, gold has consistently maintained its purchasing power.
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I highly encourage you to read the latest interview with Hugo Salinas Price. Mr Price is a retired billionaire who made his fortune via a chain of appliance stores in Mexico. He is also a tireless advocate of sound money. His plan to reintroduce silver as a competing currency in Mexico would make it the most sought after money in the world bar none. It is well worth your time to understand the details of how he proposes to do this.

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