Why Gold?

To many culture, gold is a sign of prosperity, luck, and good fortunes.

In the financial market, gold is often referred to as a hedge against inflation.

What are inflation and hedge, you ask?

Inflation (Consumer Price Index)
A consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. It is one of several price indices calculated by national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.

I like to use the example that most college professors use to describe inflation to someone walking on the streets.

"What is the price of a cup of coffee say, 10 years ago?"

"$0.50 USD?"

"How about today?"

"$2.00 and more if it's Starbucks!"

It's essentially the idea that things get more expensive over time. The index sets a baseline and each year the industry measures how much more it now costs to purchase the same amount of goods. Generally inflation is about 1-3% per year in North America.

Here's where it might need a shift in thinking (paradigm)... your money's only as valuable as the price of goods. It's all relative!

Think of eras of hyper-inflation in unstable times where government might be phasing out and there is no certainty the currency would be worth anything - inflations of 200%+ means people would rather have something tangible like a loaf of bread or warm clothing versus $100 bills that might not be worth anything if the government is gone tomorrow!

Hedge

In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge. Holbrook Working, a pioneer in hedging theory, called this strategy "speculation in the basis,^[1] where the basis is the difference between the hedge's theoretical value and its actual value (or between spot and futures prices in Working's time).

Simply put, it's a risk management method. Given everyone has a certain amount of money, and our money's worth less and less every day - what should one do to limit the devaluation of your money?

To fully understand the possible solutions - let us re-examine the currency model. Below is a link to a 47-minute video which covers the short history of how banks and our current monetary system came into existence.

"Money As Debt"
http://video.google.com/videoplay?docid=-9050474362583451279&hl=en&CFID=161233&CFTOKEN=5080a25a729e7585-24062F61-FF70-A07E-9CE8F916A29166B7

Historically, gold was the easiest way to pay for things. The value of gold as a precious metal, decoration, its malleability, and its widely recognized value made it an easy choice as a currency. Gradually, people started holding their gold coins and bars in banks and safety deposit storages.

Now instead of withdrawing bars of gold to buy things they need, merchants started accepting notes from the owner of these bars to allow the merchants to take out the amount of gold equivalent to the purchase - this logistic improvement helped business and furthermore - established the currency as a relation to a physical deposit - gold.

The vidoe goes further to examine banking system - but one thing is clear - in a time when currency is devaluing, people tend to flock to a tangible indicator of value.

This is why gold has been rising to the lofty $900/ounce levels over the last year as the US dollar became weaker and weaker versus various other currencies (Canadian dollar for example - was at par with US for the first time in 30 years in Sept 2007).

With various costs rising (food, energy, oil), and large interest rate cuts, wouldn't you agree that gold should go further? Please take a look below at a picture from Mr. Hommelberg's site, it should be pretty obvious that as inflation spikes - gold seem to follow.

Any comments, feedbacks, and critisms always appreciated.