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Gold: A safe haven against what, exactly?

As of this writing, gold is up above $1800 an ounce; it’s been driven so high at least partly by the idea that gold is a safe haven in these chaotic times.

But how, exactly?

I understand why gold was so popular during its last big run-up in the 1970s—then, the problem was inflation. Your money was likely to be worth less next year than this year, so keeping it in your mattress (or, as it happened, in bonds, stocks or real estate) meant losing purchasing power every year. One thing money lost purchasing power against was gold; the flip side was that if you bought gold it was worth more money every year.

Of course, things went crazy (gold hit $800 an ounce back then), but the idea that gold was a hedge against inflation was fundamentally sensible.

But today, the problem isn’t too much money, it’s the opposite. Since the 1980s, the prices of assets (stocks, bonds, real estate, financial instruments) have been run up far beyond what there’s actual money to justify. These bubble prices hold only until too many people try to cash in at once, at which point it turns out that there’s not that much real money around and asset prices collapse.

Or at least prices would collapse, except that the governments of the world have gotten the habit of bailing out the financial system (which has happened over and over since the 1980s).

The problem since 2008, in a nutshell, is that assets are so overvalued that even government bailouts don’t do it anymore; the most imminent economic danger is that of a financial collapse, leading to another dip in this depression.

How, exactly, does owning gold protect against that? Gold is just another asset whose price has been bid up. In another financial collapse, the owners of gold will be desperate for cash (to pay back the money they borrowed to buy other assets that are now worthless). They’ll sell gold as quickly as they’ll sell anything else.

Which is what happened in the 2008 crash; gold lost value. You would have been better off simply holding on to your cash, and I think that applies today too. Cash is the safe haven.

And now, the two objections:

1: It’s true that an ounce of gold is always going to be worth something no matter how hard the crash. But that’s also true of other investments, like a New York apartment or a share of GE. Unless society completely collapses.

2: If society falls apart completely, a gold coin will get you farther than a dollar bill or a stock certificate. BUT, most people who invest in gold as a safe haven are not buying the metal itself; they’re buying pieces of paper that give them ownership of gold. If we’re knifing rats for dinner, a piece of paper saying that you once owned gold won’t be worth any more than a dollar bill.

So what, exactly, is everyone thinking?

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