ABSTRACT
Gold is only one of many financial assets today. Individuals rarely hold a significant fraction of their wealth in this form, but it is one that serves as a hedge against inflation in fiat money. Alan Greenspan is said to watch the price of gold closely, for signs of market sentiment on inflation and deflation. An inflation hedge must generate gains and losses to offset inflationary losses and disinflationary gains on the rest of the portfolio. At that rate, gold would be a diversifier of risk-by hedging up a part of the total portfolio-but it would not be a hedge asset for the whole portfolio. The cumulative real rate of return over long periods of time will net out to zero, as it did over the last sixty years, if episodes of unexpected inflation and unexpected disinflation net out. Proponents of a gold standard like to point to the hedging properties of the metal as rationale for a gold standard.
