British economist John Maynard Keynes referred to gold as the “Barbarous relic”, and billionaire hedge fund manager George Soros described it as the “Ultimate Bubble”. Even the Sage of Omaha Warren Buffett believes it has no place in an investment portfolio. Despite a whole host of other prominent gold sceptics, such as the Financial Times, The Economist and CNN’s Fareed Zakaria; gold still remains an incredibly popular asset class. No other investment topic triggers such impassioned and fierce debates as gold. Gold bugs eternal enthusiasm for this shiny yellow metal has always puzzled me. Their justifications for holding gold simply do not stand up to scrutiny.

Two of the most often touted reasons for holding gold are that it’s a hedge against inflation and a protection against the potential collapse of our monetary system.

Inflation? What Inflation?

Firstly, the spectre of runaway inflation, predicted by many economists following quantitative easing hasn’t materialised. In the U.S., Consumer Price Index measured 2.9% this January and February, in Europe it was slightly below 3%. In the US, the spread between nominal and inflation index bonds remains low; according to Ben Bernanke this would suggest inflation of just 2% over the next 10 years. Recoveries from balance sheet recessions have historically been followed by a period of protracted and anaemic growth, a scenario most likely leading to a prolonged period of low inflation. Furthermore Europe and the United States will be in for a long period of tax rises and spending cuts to tackle their unsustainable deficits. This would imply years of stagnation or modest growth at best. Many economists fret about the inflationary side effects of unconventional monetary policy, but they are forgetting the vital role of the bond market in unwinding the effects of QE by pushing up long-term rates, this is called monetary austerity. All together this would suggest an extended period of low inflation, which is hardly a bullish scenario for gold.

Safe Haven? 

Secondly, gold is viewed as a safe haven asset against the possible collapse of paper currency. The euro crisis strengthens their misguided belief that the state of fiat currency is at stake. Ironically the euro is very similar to a gold standard, and a gold standard has already been tested in the global economy and failed. In a modern economy, a gold standard is too rigid. By removing the safety valve of currency devaluation, it…

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