The Best Hedge Against Inflation

 | Feb 11, 2013 | 5:30 PM EST
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Let's face it: Gold has been dismal. Everyone who bought into the idea that this metal would somehow protect against inflation and central bank "money printing" has been duped. Gold has been a lousy performer.

While it's true that in the last four years gold has appreciated about 60% in value, stocks have doubled. You might say that you're still happy with your gold; however, that underperformance came despite unprecedented central bank actions, massive amounts of quantitative easing, a near collapse of the euro, ongoing wars and instability, riots and protests in Europe and America, the downfall of regimes in Egypt, Tunisia and Libya, a first-ever U.S. credit downgrade and much, much, more. Four years ago if anyone had told you that we'd be going through all that, you'd think gold would be up more like 600%, not 60%.

I don't know why anyone would own gold. It pays you nothing: no dividends, no interest, no nothing. It might look good around your neck, but if you buy enough of it, you're going to want to insure it and make sure it's locked up in a safe place. In other words, it costs you money to own. Maybe you'll get lucky and some fool will pay more than what you paid. You'd better hope so because that's the only way gold gains in "value." And to monetize it? Guess what? You have to sell it. Some bargain.

You can't eat gold, you can't cook with it, you can't light your home with it, you can't burn it to keep warm, you can't put it in your car to make it go. You can't even pay your taxes with it. And that last point is a big one because that is what has always defined money -- what the state will accept for payment of liabilities and debts. Okay, maybe some guy in the backwoods somewhere will take your gold for a bottle of whiskey, but the government won't take it to settle your tax bill. They'll tell you to go sell it and pay in dollars, yen, pounds, euros or whatever -- it just won't be gold.

I've seen some of the gold-mining reality TV shows that have popped up recently. They remind me of the home-flipper shows that were popular at the height of the real estate bubble -- and we all know how that mania ended. But what strikes me about these gold-mining shows is the vast waste of energy and resources looking for a few flakes of yellow metal, not to mention the environmental damage. These crews of otherwise extremely motivated entrepreneurs and risk takers invest their life savings buying tractors, ploughs and all kinds of expensive heavy equipment. They burn thousands of gallons of fuel -- energy that will never be recouped and could be used for better purposes -- and they despoil pristine environments for a few ounces of gold. It's appalling when you think about it. Such waste, for what? The manpower alone could be better served repairing roads or building schools or hospitals or hauling equipment to construction sites, but instead it's being used to pull a few crumbs of ore out of the ground that will eventually be melted down to sit in a vault somewhere. What folly.

If you're worried about inflation, own common stocks. Nothing -- I repeat nothing -- has performed better as an inflation hedge over the long term. And this is not going to change. It's simple logic. If there is inflation, companies will raise the prices of the goods and services they sell to protect profits. And if they can't raise their prices because of competition or whatever, then they will cut costs. The bottom line is that profits will grow over time, outpacing inflation, and those profits are put back to work to expand and grow, which means new profits. It's math. And best of all, society gets the real goods and services that it needs to thrive and raise living standards, not simply some metal bars that sit in a vault.

Remember, stocks go up over time, both nominally and in real terms, but gold has only increased nominally. That's a big difference.

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