Gold's Value is Relative
When Zimbabwean-style inflation comes ashore in North America, the value of any hard asset will go up. Fiat currency will weaken, and metals such as gold and copper will increase in value relative to the US dollar.
However, we have a hard time measuring the price of gold in US dollar terms. We cringe every time we hear gold is going to hit $10,000/oz. If this happens, we expect the cost of a loaf of bread to hit $20, and it will cost $500 to fill up the average car. In relative value, we expect gold’s purchasing power in terms of real goods to remain steady or even decrease.
Currently, the going price for a loaf of white bread is about $2.99, meaning at today’s spot gold prices ($1,730/oz.) and zero transaction costs, we should be able to buy approximately 580 loaves of bread with an ounce of gold. Based on predictions from managers of gold companies, fund managers, and bullion distributors, the spot price is on its way up to $2,000/oz. or $3,000/oz. in the next year and could even crack five digits at some point in the future.
From a back-of-the-napkin prediction, one could argue that as spot prices reach $2,000/oz., $3,000/oz., and $10,000/oz., you could take an ounce of gold to the grocery store and buy 500 loaves of bread, 750 loaves of bread, and 2,500 loaves of bread, respectively. That would be a pretty good return on investment if only the world and gold prices worked that way.
However, gold does not function the way AAPL, RTP, or BMO function. Gold does not have any underlying value backing it except 3,000+ years of history and a fairly easy-to-understand supply line. Stocks and other investment mechanisms increase in value because additional information comes onto the market that is fundamentally more valuable than previous information. This is true about commodities like rare earths and lithium, for which additional technical value has been found over the last 20 years. On the other hand, gold tends to go up in value because of changing states of the economy (such as inflation or default).
Thus, gold price is correlated with bread and overarching food prices, which in turn correlate to the state of the economy. In ounce-to-loaf terms, gold may have some upward motion left, but it is highly unlikely it will see gains of six times its current value.
What does this mean for gold as an investment mechanism? Two things. First, it is probably fairly safe as a hedge against the economy slipping further, but as the old adage goes: safe investments do not make someone rich, which leads to the second point. A gold price of $3,000/oz. reflects as much about poor economic conditions and fear regarding government backed-currency markets as it does about gold's purchasing power. So the next time someone tells you to buy gold because it is going up, up, up, realize that an ounce of gold might get you more dollars, but neither is going to get you more bread.
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