Why I am not a gold bug

November 29, 2018

Pat Heller

I periodically remind readers and listeners that they need to own a small percentage of their net worth or investment portfolio in bullion-priced physical gold and silver.

I consider this allocation to be “wealth insurance” against the risk of a major decline in the value of paper assets such as stocks, bonds, and paper currencies.

In making this recommendation, I have to tell you I am not described as a “gold bug.” Such people are rigid advocates of gold or gold and silver as the only real forms of money. Over thousands of years of history, that has been true. So, those who are ardent gold bugs appear to have a solid basis for their advocacy.

But, that isn’t me.

In my mind, the free market can identify what would serve as the most practical medium of exchange. That might or might not be physical gold and/or silver. It might involve some electronic form that has some precious metals backing. Or it might evolve into something having no gold or silver component at all.

Just like the discovery of the concept of money was a free market innovation to facilitate trade, I am open to the possibility that the free market can find a better medium of exchange that might improve economic development as technology advances.

Still, physical gold and silver has an important role in today’s global economy.

Should the U.S. dollar fall significantly in value or totally collapse, that would also put other fiat, or paper, currencies at risk of decline or failure. In such a circumstance, I expect that physical gold and silver would instantly become the most popular alternative forms of money because of their thousands of years of monetary usage without ever failing.

Six thousand years ago, gold bars of set weights began to be used in Egypt for exchange. More than 5,000 years ago, Egyptian pharaoh Menes decreed that “one part gold is equal to two and one-half parts of silver in value.” About the same time, touchstones came into use in the Indus Valley civilization, near modern-date Pakistan, that could be used to assay the purity of gold to facilitate its use as a medium of exchange.

Actual gold coins were first minted around 2,600 years ago, in the Greek kingdom of Lydia, on the west coast of modern-day Turkey.

Silver has been used as a medium of exchange nearly as long.

So, when I advocate owning physical gold and silver as wealth insurance, it reflects my judgment that it would protect people’s finances during a paper currency crisis, as has occurred repeatedly over the past few hundred years. For recent examples, just look at the Far East Asian currency crisis in 1997, the collapse of Zimbabwe’s currency in January 2009, and the Venezuela bolivar this year.

But that does not mean I am a diehard gold bug.