Gold and the U.S. Dollar

Should the budget deficit make you buy gold as a hedge against a collapse of the dollar?


Should the budget deficit make you buy gold as a hedge against a collapse of the dollar? Perhaps not, according to fund analyst Kurt Brouwer at the Fundmaster blog:

  • The pitch for gold goes something like this: The dollar is losing value because the government is just printing money that is not tied to anything tangible like gold. Gold has been a storehouse of value for thousands of years. Stocks are risky as are bonds, but gold is a hedge against future inflation. Our government is piling up huge amounts of debt that can never be repaid and foreign governments—China in particular—own so much of our debt, that they could decide to collapse our economy by selling Treasury bonds and moving the cash to the yen or some currency other than the dollar. Gold is also a tangible asset that will be worth something if the economy collapses, etc.
  • For example, the claims that our government debt is high are silly. U.S. government debt of nearly $9 trillion is about 66 percent of our gross domestic product (GDP). This ratio is lower than those of Japan, Canada, France, and Germany, for example. And of that $9 trillion, about 45 percent is owed by the government to itself. About 28 percent is owned by U.S. citizens and permanent residents. Only 27 percent is owned by foreign entities, primarily governments. The number one foreign government in terms of ownership of our debt is—Japan at $612 billion. China is next at just over $400 billion, which is under 5 % of our total government debt....If you like the feel of gold coins and want a few percent of your portfolio in coins, no problem. However, if you are doing this as a hedge in case the economy collapses, you better be very careful.
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