What if they could print gold?
Especially lately, advertisements warn that only gold can protect against inflation. The dollar is being printed as fast as the Fed can find cotton. Only gold holds its value against central banks everywhere debasing their paper fiat currency.
It's currently a lot harder for the Fed to mint gold coin than to print paper money or apply digital credits to digital balance sheets. And it probably always will be. But there really is no guarantee that gold itself will protect against inflation. After all, what if we find a lot more gold? What if we find a way to efficiently extract gold from seawater? What if we find a way to efficiently extract gold from garbage heaps, or diapers?
There are millions of troy ounces of gold being pulled out of the crust each year around the world. The average person probably has less than one troy ounce of fine gold, including wedding bands and jewelry. Gold is destroyed through industrial use, but not nearly as much of it as we pull out of the ground. And gold mining has gone on year after year for a long time.
People have been pulling gold out of the ground, streambeds, and defeated peoples' temples for more than 3,000 years. This history is undoubtedly one of gold's strongest appeals as an investment: around the globe, peoples who had no known contact independently value gold as ornamentation and a sign of status, for as far back as recorded history can tell us. Egyptians in Egypt, Incas and Aztecs in the Americas, the Mediterranean basin, the middle east, India, ancient China and southeast Asia is home to ancient gold artifacts. Apparently people in sub-Saharan Africa treasured salt more than gold, and gladly made the trade.
Gold's unique physical properties probably seem unimpressive to people living today. It's ductile, meaning you can bend it and shape it fairly easily. Today we have synthetic steels and resins, and can have machines work jewelry into intricate designs. We all had legos and silly putty and have played with tin foil, so we're not impressed by ductile. But in the old days, when finding a way to make a shirt purple was a big deal, gold's physical properties got special attention. Keep in mind, these people hand't invented toilet paper.
Today it isn't clear exactly why gold is so valuable, but we feel safe trusting the judgment of 3,000 years and people around the world. Stock Market news analysts on TV say gold will protect from inflation, because "they can't print gold." And that is true. But history also contains examples of gold inflation that all gold investors should consider. For example:
(1) In the 800s and 900s the Byzantine Empire was struggling under pressure from the Muslim onslaught and Bulgars and amateur Russians. Mostly, the Empire had been buying its way out of invasions with annual tribute. That tribute was mostly gold bezant coins, each of about 24 karat gold and 4.5 grams. During this time huge new gold ore deposits were discovered on the Empire's property, which was promptly mined and minted into more coins. The price of everything in those coins, or other gold coins, went up. The value or "buying power" of the tribute received by the Bulgars went down. Sounds like what the United States is doing now with the dollar. No paper money in Constantinople.
(2) In the 1500s Spain was importing tons and tons of gold from the "new world" i.e. Mexico and South America. Once they got all this new gold, the Spanish went to work minting and spending thick gold coins with crosses on them. These flooded Europe, and the price of everything except gold went up. This was not a transient effect. It lasted for centuries. The Spanish mining technology employed at the time was primitive compared to the machines shredding rock in Peru today.
It's true that the global population is exploding. This means we need more rice, pigs, and oil. This also means that there is less gold available per person. But don't rule out a surprise discovery of either more gold, or a new way to cheaply and easily extract a ton of new gold. Inflation can happen to anyone.