Jeff Opdyke’s claim that gold in a currency not a commodity

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The 8/21/10 issue of the Wall Street Journal has a guest columnist for Jason Zweig’s “Intelligent Investor” column. The guest columnist, Jeff Opdyke, said gold is not a commodity; it’s a currency. His evidence is a much higher correlation between gold and the value of the dollar relative to other currencies than between gold and inflation of the dollar.

Interesting, but wait a minute. In How to Protect Your Life Savings from Hyperinflation & Depression, I said inflation is just one side of a 13-sided coin. See pages 24 and 43 of the book. The other “sides” include imports and exports, interest rates, unemployment, value of the dollar relative to other currencies, and so on. My point was that a change in any of the 13 “sides” affects all the other sides, although not in lockstep. There are millions of variables that constantly affect each of the 13 “sides” so there can be offsetting or amplifying effects on some “sides of the coin.”

To an extent, isn’t Opdyke double counting his correlations? Clearly, the relative values of various major currencies reflect the market’s opinion of the likelihood of inflation in those currencies. Equally clearly, the presence of recent and current inflation drives down the value of the currency in question. So Opdyke’s inflation currency comparison is not comparing apples to oranges as he purports, but rather it compares apples to a fruit cocktail of apples and oranges.

He seems to be saying dollar inflation does not affect gold prices. But his time period—1978 to present—is a time when high inflation initially subsided then never rose significantly again. It’s hard to draw conclusions about the effect of inflation on the price of gold from and period of disinflation followed by a period of price stability. And gold sure as hell was sky high on January 21, 1980 (see my article on the disadvantages of gold as an inflation hedge) and that was because the inflation rate that year was 13.5%.

Also, to a large extent, currency is a commodity. The broad definition of a commodity I use in How to Protect Your Life Savings From Hyperinflation & Depression is fungability. Currencies are fungible—each dollar bill identical to all other dollar bills. Governments claim their currency is a commodity when they promise its purchasing power will not diminish. It only deviates from being a commodity when the government or its central bank falls off the monetary-policy-discipline wagon. So Opdyke’s statement that gold is not a commodity, it’s a currency, is incorrect because currencies are, themselves, on-again-off-again commodities.They are commodities when their purchasing power is stable but not when they allow inflation.

Plus, Opdyke’s whole exercise leads nowhere. Expertise and useful knowledge must end in a statement of a best practice, a rule to follow always or under certain conditions. He says to decide whether to buy gold based on “your beliefs about the future of the greenback. Just don’t invest based on the idea that gold is a proxy for inflation.”

Beliefs? What are we talking about here? Investing or religion? I have often said that gold is a religion and Opdyke makes that mistake. Believe this: no one can forecast the future of the greenback or gold or inflation, period.

My best practice advice in How to Protect Your Life Savings From Hyperinflation & Depression is that you hedge against inflation, which is a market basket of goods and services, by investing in, well, a market basket of goods and services. I say to buy “everything you’re going to need for the rest of your life now.” I call that investing in the You Price Index which fits your life better than the government Consumer Price index. Obviously trying to buy everything you are ever going to need for the rest of your life will be incomplete—like you cannot now buy surgery you may need in ten years—but you can a lot, maybe enough to prevent going bankrupt during a monetary crisis.

Since the market basket of goods and services includes commodities, investing in a broad commodity price index would make sense as a way to partially hedge against inflation. By buying everything you need for the rest of your life, you are also buying a bunch of commodities including many contained within manufactured products.

Opdyke’s “according to your beliefs” advice is the equivalent of Will Roger’s stock market advice: “Buy a stock. Wait for it to go up.Then sell it. If it don’t go up, don’t buy it.” In contrast, my best practice on the same subject gold/inflation makes actual financial sense and can be followed by a non-clairvoyant person.

John T. Reed