Wednesday, December 22, 2010

Gold is Mighty Expensive Inflation Insurance

Generally the price of insurance rises after an event occurs.  Hurricane insurance increased dramatically after Hurricanes Ivan and Katrina.  Terrorism insurance experienced exponential price increases after the 9-11 World Trade Center attacks.  However, if we consider gold as insurance against inflation, it contradicts this notion and appears mighty expensive.  The chart below shows how much commodities (CRB Index) one unit of gold will buy--4.24 now and 4.75 at its 2010 high.  At its extreme in the most recent previous gold bubble in January 1980, the  price of gold moved to 2.84 units of CRB after an entire decade of 5-15% US CPI increases stimulated huge demand for inflation insurance.  Gold is now 60-70% more expensive versus the CRB than at the end of the previous bubble.

GOLD priced in CRB


Inflation insurance at Gold Insurance Company is ridiculously expensive, or the inverse, inflation insurance through the CRB Insurance Company is extremely cheap.  If we get inflation, an investor will do much better with the CRB.  Gold might move higher but not nearly as much as all other commodities.


45 minutes

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