I see a lot of people that advocate gold as an asset of “last resort” kind of investment lately. More than just a hedge for inflation, the theory goes something like this:

In a doomsday scenario, the dollar will collapse as a medium of exchange, due to a loss of confidence in the US government to pay its debts. With the dollar will go all other forms of currency that are based on paper (since we left the gold standard under Nixon), and then we will be left without a currency, except those that have precious metals, such as gold and silver. So the more you buy of those, the better.

I’m afraid I don’t buy it. Not that I don’t believe that gold is a good investment currently (mine is up almost 100% since I bought it), but I don’t buy the assumptions behind the disaster scenario. First of all, if all the world’s currencies collapse (which seems unlikely), there are going to be some pretty desparate people around. If gold and/or silver do become the medium of exchange, and I’m out there buying food for my family with gold, isn’t that going to be a signal to all the desparate people with guns? Seems to me there might be some forcible reallocation of wealth going on in such a financial disaster. Second, in localized disasters, gold is too rare to become the medium of exchange, and a barter system usually crops up in which whatever is useful becomes valuable and thus, a medium of exchange, whether it is gold or something like sugar, salt, cigarettes, or even Levis. Whatever has value and can be transferred to another for goods and services can become a medium of exchange, and it doesn’t necessarily have to be valuable currently.

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