Friday, July 22, 2011

Hedging about hedges

When the press writes about gold buyers, they often include a subtle jab like, "Investors buy gold as a hedge against inflation and the collapse of civilization."


Civilization doesn't have to collapse for an investor to make money in gold, any more than a country has to collapse for an investor to make money in credit default swaps. The direction of your bet just has to go in your favor. No one says you have to ride your investment all the way to Armageddon.

Example: If you bought gold at $800 and sold at $1,6000, you made a nice gain. Yet there is still food on the shelves, judges in the courts, and gasoline at the pumps. There are also no roving bandits motorcyling about.

Plenty of investors buy 30-year Treasuries. No one expects them all to actually hold them for the full 30 years. Not even close. It's a trade, not a buy and hold to infinity.

Gold is like insurance, and buying insurance is seen as prudent. Yet gold, man's longest running form of insurance, is often viewed as a foolhardy investment (in fairness to gold's critics, insurance buyers are rarely the harebrained Quasimodos you sometimes see buying gold).

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