Perhaps not as great as you might think.

Here are a couple of threads on the subject:

http://www.bogleheads.org/forum/viewtopic.php?t=80685

http://www.bogleheads.org/forum/viewtopic.php?t=80658

 

I don't get it. Isn't gold way over inflated now and bound to plummet eventually? How is that a hedge against inflation?

 

Thanks for the links, Magician. I did read them and I appreciate the insight.

Since I've participated quite a bit in this thread, perhaps I should clarify why I've increased my holdings in PMs over the past few years. Inflation is actually just one small factor. I believe we're on the verge of a global currency crisis.

The U.S. Fed and Gov have demonstrated, through their actions of QE1, QE2, ongoing ZIRP, ongoing POMO, TARP, TALF, etc., that they are protecting their own interests. These are self-preservation actions, nothing more. NONE of these programs are in the interest of the people or preservation of the value of the dollar. They are efforts to protect the status quo, debt-driven economy. These are actions that have not taken place in our current history, and are directly attributable to the banksters who took control of our currency in 1913 - solidified by Nixon removing the FRN from the gold standard. This isn't about a housing bubble. A gigantic public/private credit bubble began forming right around 1980 and has finally popped. Bubbles don't reinflate, ever, historically, no matter the injection of liquidity.

History shows, 100% of economies based on fiat currencies have failed. In my observations, looking at the math, politics and rainbow-colored, skittle-crapping unicorns aside, we've hit that debt saturation point of no return; as has every other fiat economy, in history, with 100% certainty.

If the Fed does the right thing and allows this thing collapse, i.e. raises rates, clears the debt, lets insolvent, mark-to-fantasy banks fail, lets a deflationary depression occur, gold will likely plummet and I'd actually be happy. I hope they do let this economy deflate. I'd be happy with $300/gold and a strong FRN over the alternative,

 

^ I enjoyed reading your comment.

 

As an Australian I see you guys (Americans) with too much debt ($130,000 per taxpayer isn't it?), tied to fighting 'wars' around the globe and with a huge liability for welfare and medical benefits. Politically it's impossible to "do the right thing" isn't it? Voters won't go for a politician that's going to rob them of their free lunch, it's easier to just print money and die a slow death financially.

 

This may sound strange, but I personally will be extremely surprised if the US truly experiences any sudden or dramatic financial death.

I think the US would instead dump the cost all over the other players in the world economy. Not that there's really a choice to an extent due to the large world GDP share, but rather, I expect the US would intentionally further trash the dollar down to dirt, to lows so artifical it's a complete joke, then repay debts quickly at rates of pennies on the prior dollar when all dollar-denominated debt has effectively been depreciated by an order of magnitude or so. With so many tools due to our large share of the world economy--the volume of circulated US money, US tax rates and trade policy, policies driving interest rates--this wouldn't be too hard for a clever political force to pull off.

Trend policy to scare the markets, damage the value of the debt, pay it down while it's depreciated, and then the US could move on feigning innocence, pretending it was just a bad year or decade etc. Wall St. would see it, so the US economy would look ok on the surface since Wall St. business would be making fistfulls of dollars on the fall, and that makes for enough good press to offset the ugly.

Maybe that's just my imagination hard at work, but I have always been suspicious that type of lever would pull the US out of the debt pit if a real crisis occurs. A true default would be too messy. Too big to fail?

 

You completely missed the fact that to pay off the debt that way would involve impoverishing the entire nation by completely sapping the purchasing power of peoples' incomes and crushing decent people who have saved all their lives in a prudent manner by making their savings completely worthless. Not to mention the fact that US debt would be permanently labeled as junk henceforth and no one will ever touch it with a thousand foot pole in perpetuity. Basically if your story plays out the country would be destroyed, not saved.

edit - don't take it as an insult, you aren't alone with that view. Many nobel prize winning economists and Obama economic advisors more or less tell the same story you did, though obviously not as simplified.

 

/\/\
Lol yep, I did forget that important fact entirely--thanks! The last of the group to see it coming would be working class folks with 'safe' 401(k)s, and they'd go to zilch. So the hard working Americans that saved would lose more than anybody else. Not so awesome.

My wife is a resident physician and we just bought a house, so between student loans and the mortgage I tend to forget what it's like to have a positive net worth. We've just got loads of debt right now, a lot like our wonderful nation.

Maybe when we turn that around in a few years I'll start thinking straight again! And in the meantime, I won't quit my day job in engineering.

 

6. What do I do when the price of gold tanks and I'm sitting on a big pile of it?

 

A US debt default would mean one of two things:

a) planet of the apes,

b) mad max.

Either way it would not end well for anyone. It's kind of like remodeling your kitchen by setting fire to it. If the US dollar became worthless the real commodity would be guns and ammo, not gold. Guns can get you food or take it away from someone else with a smaller gun. Gold doesn't taste too good and the people with guns would just steal it anyway.