Despite quantitative easing, we haven't experienced any significant inflation. In fact, we are getting very close to a deflation.
If you have a very pessimistic view of the stock market's future, reducing risk by being in cash make a lot of sense.
If you have a very pessimistic view of the stock market's future, reducing risk by being in cash make a lot of sense.
Aggregate price inflation has been low over the past several years. A big part of that is that energy prices are much lower than they were three years ago (remember $4+ gas?). That is only a very temporary phenomenon (long term supply is constrained, demand is exploding as Asia develops), and in any case energy is only one part of the economy.
But asset inflation is a real problem. That is why the price of gold has tripled in the last half dozen years. If you put money into either stocks or cash 5, 10, 15 years ago, you're way behind where you would be having put the money into a store of wealth that is portable and not subject to inflation.
Suppose you had some completely arbitrary asset. Kneezles. Over the last few years, the price of kneezles have tripled. The kneezle-bugs come out of the woodwork and say, "Look, if you had invested in a store of wealth that is not subject to inflation, you'd be doing better. Your kneezle-denominated wealth has fallen greatly."
Well, what are kneezles anyway? They're lumps of metal that don't do anything. Hey, sounds familiar...
Neither do paper dollars - it's an abstraction that has been historically coveted and accepted as money, and that's why it's valuable. I'd take gold alternative to paper money if someone wanted to pay me in it and had proof of its purity.
Gold is a store of value. Stores of value provide a useful function in society. Very few things actually qualify as stores of value, and gold is the most known of them so I used that, but you could replace the string 'gold' with 'store of value' in my argument without changing the substance of my argument.
Something is a store of value because you expect that other people will value it as highly in the future as they do now. (Or at least some predictable fraction less, accounting for inflation.) Whether it's gold or dollars, it's still based on investor psychology, and is still just as subject to whims of herd behavior. Ask people who bought gold in 1979 how well it stored its value.
Gold is used by several industries. Gold is found in every cellular phone!
The reason gold is used as a metric against currencies is because its scarcity is NOT illusory. USD's scarcity is dictated by the FED. Gold's scarcity is dictated by the earth's limited supply of gold, and the socioeconomics of gold mining.
If you're risk averse, broader market decline is a bigger worry than inflation IMO.