A fiat currency is only worth as much as two people agree it is. This is a difficult concept to understand in a strong economy. It’s best understood as a game of musical chairs. When you sell goods and services, typically, the seller is paid with the fiat currency of their respective government. However, once a seller decides that he or she does not want to receive a fiat currency in exchange for goods and services, a chain reaction can begin. Naturally, declining to be paid in a fiat currency means the demand for that currency has diminished. Lower demand causes the value of the currency to go down.
There is another way that a fiat currency can lose value. This can happen through inflation. Fiat currencies are subject to the laws of supply and demand just like any item in a free market. Central governments control the supply of fiat currencies and use this control to provide stimulus and liquidity to their local markets. If a government provides too much supply of the money for the current demands, inflation can result. The prices of goods and services that the currency buys can go up as a result. If, for some reason, the supply far exceeds demand, hyperinflation can result. This is a much more extreme case and can accelerate very quickly until the currency has lost most of its value.
Gold has a history of being used as money throughout the world for hundreds of years. Gold also has utility value as a traded commodity. It has industry uses in medicine and electronics. It also has massive demand in the jewelry markets around the world, This added demand for gold as a commodity has always given it a sense of stability as a currency. As fiat currencies go through hyperinflation stages, gold is more able to keep up with the rising prices of goods and services in an economy. This has always made gold a good choice as an investment hedge against the risk of inflation.
Gold stocks provide an easy way to invest in gold. As opposed to physical gold, which an investor has to worry about how to store, gold stocks can be obtained with a click of a button in an online browser. It can’t be stolen out of your house while you are at work. It’s easy to buy and sell and it provides a sense of security and diversification, especially at times when you feel like markets are changing or becoming more volatile.
For the most part, people don’t even consider that a fiat currency could lose the majority of its value. It does happen though and it typically is not something that people can predict or see coming. It’s something that is recognized after it’s too late. So, the next time you are looking at your portfolio to see how diversified you are, take a look and see what gold stocks you own. Gold stocks shouldn’t be viewed as an investment that grows your money. They are there to protect what money you have, they are a hedge against the unknown, and to provide you with peace of mind.