Why Gold can not be a hedge against inflation

DETROIT (ResourceInvestor.com) -- Gold hit a new record high price last Monday, January 28, 2008. Had you purchased one ounce of pure gold on Jan. 21, 1980, you would have paid $847.00 for it; in 1980 dollars, or, according to the Wall Street Journal today, an astounding $2,228.60 in inflation adjusted 2008 dollars.

Therefore if you had sold on Jan. 28, 2008, the one ounce of pure gold, which you purchased on January 21, 1980, you would have lost in 2008 dollars the sum of $2,228.60 minus $927.10, which equals $1341.50. The interesting part of this calculation is that many gold sellers today are still telling you that you would have made $927.10 minus $847.00, so $80.10.

This kind of illogical trickery and double-speak pervades the so-called precious metal market. Even the sober and conservative WSJ, which gives you the inflation adjusted figure of $2,228.60, for the previous 1980 highest price of gold goes on to tell you: “The precious metal has been a horrible hedge against inflation. To keep pace with inflation going back to 1980, gold futures would need to be above $2,228 today. Believers see that as a sign that gold has a lot of room to rise and predict it will surpass the $1000 mark this year.”

Incredibly the WSJ does not point out that even at $1,000 gold would not even come close to tracking, much less alleviating the cost of, inflation over the last 30 years. The cumulative inflation rate of the U.S. dollar since January 21, 1980, essentially over the last 28 years has been 167%!

These constant discussions and articles about gold and other so-called precious metals as hedges against inflation clearly prove that over the long run they are not any such thing. In dollars as a ‘store of value’ gold cannot hold a candle to most of the ‘minor metals’ or even any of the so-called base, i.e., common, metals.

Now ask yourself, to paraphrase the words of the poet, “What rough beast slouches towards [Washington] waiting to be born?” For natural resources the answer is clearly price inflation from too much money, created in part by making the Fed Funds Rate too low, so that banks can ‘create money’ by borrowing it very cheaply and lending it out at higher rates, chasing the too few domestically produced natural resources, the shortages of which have resulted from, in great part, an anti-mining bias promoted by activist environmentalists who fix their sights on the past and refuse to accept the advances in health and safety that have occurred in the natural resources production sector in the last 30 years.

Since our legislators, finance ‘experts’ and businessmen have systematically ignored the effects of the cornering of natural resources supplies by foreign nations and foreign businesses, which are not subject to the laws of the U.S. with regard to monopolization and price (fixing) controls, the U.S. consumer is about to discover that a rapid inflationary period is well under way, a great part of which is due to the necessity to import natural resources priced in inflating dollars, and that the only way to avoid massive natural resource driven price inflation is to slow down import demand while re-igniting the American natural resource machine.

It was widely publicized two weeks ago that a Wall Street analyst predicted that the great iron ore price squeeze, about which I wrote two weeks ago, would result this year in a 22% rise in the price of steel sheet. Then just a couple of days ago General Motors CFO announced that due to such factors as ‘raw material price increases’ the prices of cars would have to be considerably increased this year. If American financiers would try to deal with the natural resources price inflation issue by opening their eyes they would find that America could be self-sufficient in iron ore, economically, if they would just observe what the world iron-ore virtual cartel is doing. They might also try to notice that steel producers who own iron mines are not trying to sell them for short-term gain but are holding them as long term strategic risk price and availability management.

America may also need to openly admit to and widen some of the policies of resource nationalism which we in fact practice while our politicians and so-called free market favouring financial pundits hypocritically preach against them. A moratorium on the resource-conservation-by-non-production hypocrisy and its replacement by increased domestic natural resource production and recycling would also help the American economy.

An excellent illustration of the above two points was the attempt just a couple of years ago of the China National Oil Company (CNOOC) [NYSE:CEO], a state owned enterprise of the People’s Republic of China, to buy Occidental Petroleum [NYSE:OXY]. This would have given CNOOC not only the domestic (as well as foreign) American assets of a first class oil exploration, producer, refiner and distributor, with all of the state-of-the-art oil field technology and access to the domestic American market that it had, but also the assets of Occidental’s wholly owned subsidiary, Molycorp, an owner of producing locations for domestic American molybdenum and rhenium, and of Molycorp’s Mountain Pass, California, rare earth metals mine and mill, which although now shut down due to environmental issues was as recently as 1994 producing 34% of the world’s demand for rare earth metals including 100% of U.S. domestic needs then. The U.S. Congress balked at the sale of OXY to CNOOC for ‘security’ reasons, and a white knight, Chevron [NYSE:CVX], was brought in to keep OXY in ‘domestic’ hands.