Grab your wallet and stare closely at the money. What's it worth? It's worth whatever it will buy. But can you imagine a time when someone looks at your cash and really doesn't want it, because it "isn't worth the paper it's printed on"?
That's what happens when a country "prints," or creates, too much money. It loses value. The official name for that process is inflation. What's the alternative to paper? Gold. It's been the "hedge" against inflation ever since paper money was first created by governments.
In recent weeks, the U.S. government has created hundreds of billions of new dollar credit -- a faster process than the printing presses -- to offset the financial crisis of asset values being destroyed.
Suddenly the dollar is backed not by gold, or even the "full faith and credit" of the United States, but by IOUs from banks, corporate commercial paper that can't be sold elsewhere, by insurance company assets, by questionable mortgages, and soon by swaps of currency from Mexico and Brazil.
Worries about all this money creation are inspiring a growing interest in gold. Gold prices are well below their highs of earlier this year, when gold briefly traded over $1,000 a troy ounce, backed off and then traded over $900 an ounce in early October. In just the past week, gold bullion traded below $700 an ounce. On Wednesday, gold futures for December rose 1.8% in New York trading to $754.
In the global battle between deflation (represented by falling asset values) and inflation (represented by central bank liquidity creation), gold has fluctuated wildly. It's a very speculative market.
Gold coin shortages
But there's one aspect of gold ownership that has seen huge, ongoing demand: gold bullion coins.
The U.S. mint can't keep up with the production of the gold bullion "blanks" to make the coins. Thus, coin dealers around the country are rationing sales and charging a higher premium over bullion than usual.
The most popular gold coins carry 1 full ounce of gold. The U.S. Gold Eagle, the U.S. Buffalo, the Canadian Maple Leaf, the South African Krugerrand and the Austrian Philharmonic are the most in-demand coins.
"It's difficult to obtain gold coin supplies from the government distributors since world mints cannot keep up with the demand," says numismatist Bob Greenstein of Harlan J. Berk Ltd. in Chicago.
Is it just scared individuals who are buying these days?
Greenstein says this is not naive buying. "Professional investment advisers and sophisticated traders are purchasing 50 coins or more at one time."
Currently, investors may have to wait as much as 8 weeks for the most popular coins. But pure gold bars are more readily available in sizes ranging from 1 ounce to 1 kilo.
There are some negatives to buying gold coins or bars. They must be stored safely, preferably in a bank safe-deposit box. And, of course, they don't earn interest or pay a dividend.
Gold should be viewed as an "insurance" policy on the rest of your investments, not as a place to hide all your financial assets. And when buying gold as a hedge against inflation, don't forget the other asset class that has consistently beat inflation over the long run: a well-diversified portfolio of large company American stocks! That's the Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.