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02 June 2011

$150,000 Gold and Pascals Wager

Search Google for the terms "Gold" and "Hyper-Inflation" in some form and you can see a myriad of articles and blog posts predictions forecasting bullion at anywhere between $1,500 and $150,000 per ounce and beyond.

While many of the upper predictions in that range seem extreme, there appears to be no shortage of supporters for the argument. The essence of that argument usually goes something like this: Massive debt in the US and Europe will at some point become unsustainable, possibly triggering a fresh financial collapse, and policy makers will try to print their way out of the mess, which will push inflation to scale hitherto unseen peaks. Gold and Silver as a traditional inflation hedges will be carried with it.

And so, Gold gets presented as the Pascals Wager of investment decisions. This was how the French philosopher Blaise Pascal defended his belief in God. You just need to inert the letter L. Believe in Gold and you will enjoy huge capital gains when hyper inflation comes to pass, or face total capital destruction and misery. If hyper inflation doesn't come to pass, then you still have a valuable hard asset in a high inflation environment.

The chances of Zimbabwe style hyper inflation in the US or Europe are remote. They are remote because hyper inflation can only come to pass as a result of deliberate policy of hyperinflation. It is also likely that the best that Gold would do in such an unlikely environment, is preserve capital until such a time as the economic system became re balanced. Sure, $150,000 per ounce Gold would represent 100 fold profits from today’s levels, but don't expect the roll of Krugerrands in your deposit box to fund a retirement in the Swiss Alps, because under hyper inflation everything else will be that much more expensive also.

Gold should be regarded as what is has historically been - a store of value, providing very good wealth density. In other words, a capital preservation play. It now seems that rising populations and dwindling resources, combined with massive money printing of the last decade, is likely going to cause a period of sustained inflation. With the sovereign debt crisis in Greece and the wider Euro zone not yet resolved, the outcome of widespread default, or more likely, a huge round of money printing in Europe seems all but assured. Add to this, the issue of burgeoning US debt, and the Hyper inflation debate aside, there now seems as many reasons as there ever were, to make the case for owning Gold.

Hyper inflation or not, maybe that makes Gold the investment “Pascals wager” after all.

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