Protection from inflation & deflation
Comparing these two liquid savings
Savers and investors are always keen to protect themselves from inflation and deflation in the economy, but how do cash and gold investments perform in these respects?
Gold is often referred to as an inflation hedge, and it is true that gold bullion bars offer protection from increases in the money supply and money printing. Whilst gold bars holds their value, in an inflationary environment cash can be losing purchasing power every day. Inflation is a monetary phenomenon and when currencies are getting cheaper, gold stands in contrast as a superior currency and an asset.
However, it is far less understood that gold also offers protection in a deflationary environment. Gold is indeed better than cash even when local currencies are not deflating, but where defaults and credit destruction occur. In a great deleveraging, or deflationary crash, cash in the bank could be vulnerable to bank or government collapse. Gold can offer unique protection from this sort of crisis because it has no risk of default.
Should I buy gold as protection then? Keeping some cash out of the bank and in the form of physical gold bullion can indeed offer protection from monetary policies, inflation and deflation.