by seajay » Sun Jan 29, 2023 6:41 am
Pre 1930's and gold (silver) was cash/money. However savers would tend to lend that gold (money) to the state or banks (so banks in turn could lend out gold (money) to others). Safer than carrying around large amounts of gold, and you got more gold (money) in return. From the 1930's the US convinced others to use the dollar for international trade settlement, prior to that and London had cages for each country where gold bars were physically moved between those in reflection of trade surplus/deficits. As part of that the transition over to using dollars for trade the US promised to peg the dollar to gold. And that held right up to the late 1960's.
Thereafter gold/fiat-currency became disconnected. To lend gold to the state entailed having to sell gold into dollars and lend those dollars, and where at maturity there was no assurance that in total you'd even get back at least the same amount of gold as what you lent. The state and banks transitioned to where they no longer needed to borrow, and could instead print/spend or banks could just magic up debt to credit the borrowers account with. The problem there is that whilst gold can't be magically created/credited, dollars can.
For much of history gold and bonds were equivalent, the typical saver simply held bonds. From the late 1960's however and things changed. A reasonable choice for savers was to transition out of bonds and into a stock/gold barbell. US dollar fiat currency invested in stocks, alongside non-fiat gold currency.
Whilst that article looks at the intrinsic value of gold, better would have been to look at the intrinsic value of the dollar. When the state can just print/spend and devalue all other notes in circulation in so doing inflation might be considered as just another form of taxation. A barbell of two extremes, dollars fiat and gold non-fiat combine to a central bullet, similar to how a barbell of 1 and 20 year treasury bonds combine to a central 10 year treasury bullet. When those dollars are invested in stocks and since the late 1960's a 50/50 barbell of stock/gold has yielded comparable broad total return rewards as that of 100% stock.
The value of gold is that it is in-hand, no counter-party risk, doesn't have to be invested in order to offset dollar devaluation (inflation) and has the tendency that as/when stocks and bonds drop a lot, typically due to high inflation (arising out of lowering faith in fiat currency), so the price of gold tends to rise/spike. And vice-versa (when stocks do well, gold tends to lag/decline). But equally some years may see both stocks and gold down, bonds having done well. A reasonable choice might be to hold equal amounts of all three, and apply a bit of a Larry Portfolio type small cap value tilt for the stock holdings. Stocks often include elements of foreign earnings (currencies), bond domestic currency, gold non fiat currency, and three assets (stock/bond/commodity) asset diversity.