Why You Shouldn’t Buy Gold as a “Hedge” Against Devastation

Shaun writes in:

You need to be telling your readers to invest in gold because the dollar is about to become worthless.

I wrote about this idea a year and a half ago. I discussed why

there are so many ads on the radio and the internet for buying gold and why it’s just old-fashioned salesmanship – creating a demand for a product so you can sell plenty of it.

Yet, two or three times a week, I get an email from a well-meaning person like Shaun who is very concerned about the future, believes that gold is protection against that future, and wants me to warn my readers about it.

First of all, I don’t buy into fearing the future. As I said over and over again during the 2008 and 2009 financial crisis, the only thing we have to fear is fear itself. The sky is not falling. As I said then, “Even in the darkest heart of the Great Depression, 75% of Americans had a steady job with a steady paycheck, which they steadily used to buy the things they needed. Those years also produced the Greatest Generation and an economic steamroller that ran through the last half of the Twentieth Century like a tidal wave.” The Depression was far worse than anything we’ve seen over the last decade.

But let’s say they’re right. What would happen if the dollar would become worthless?

The best thing we can look at is history, where reasonably modern economies have collapsed and their currency becomes worthless. The period I’m most familiar with is the Weimar Repubilc in Germany in 1922 and 1923.

What caused it to happen? Most of the workers in the entire nation went on strike for several months, causing the nation to produce nothing. The result was hyperinflation. In one year, the price of a loaf of bread went from 163 marks to 200,000,000,000 marks.

Sounds scary. What happend, though? Did everyone turn to gold as a means of exchange?

Of course not.

The economy went back to the bartering system in 1923 and 1924. People traded services with each other and traded services for goods. Instead of working for money, people worked for food and other goods.

Egon Larsen describes it:

Bartering became more and more widespread . . . A haircut cost a couple of eggs

Willy Derkow:

You very often bought things you did not need. But with those things you could start to barter. You went round and exchanged a pair of shoes for a shirt, or a pair of socks for a sack of potatoes; some cutlery or crockery, for instance, for tea or coffee or butter. And this process was repeated until you eventually ended up with the thing you actually wanted.

To put it simply, people didn’t switch to gold as a means of exchange when things got bad. Instead, they switched to bartering for the stuff people actually needed: food, clothing, shelter, cutlery, and so on.

Gold wasn’t used as a means of exchange because gold is not something people need on a day to day basis. Food is. Potable water is. Clothing is. Shelter is. Repair skills are. Gold is not.

If you want to “hedge” against some sort of imagined financial apocalypse based on a very negative view of the future, don’t use gold as that hedge. Instead, spend your time building skills. Store up some dry food in your basement. Set up a generator. Become as self-sufficient as you can. These things will help you whether “financial apocalypse” happens or not.

If you want to buy gold as a small part of your investments, that’s great. My wife and I have considered buying a few gold coins to keep in our safe for that very purpose.

But if you’re buying gold out of fear of hyperinflation or financial apocalypse, you’re buying into marketing that isn’t borne out by the facts of history. Invest your money elsewhere, preferably in things that make you more self-sufficient.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.