What Is a Gold Bug?

In economics, the term “gold bug” is a colloquial expression used to refer to people that are particularly bullish on gold

Although people differ in their reasons for being a gold bug, they commonly share a perception that the purchasing power of fiat currencies will decline due to factors such as inflation, expansionary monetary policy, and the rising national debt.

Key Takeaways

  • A gold bug is someone who expounds the virtues of gold as an investment, and who thinks its price will perpetually increase.
  • While there are several arguments used by gold bugs, they often center on the perceived threats posed to fiat currencies that makes gold attractive.
  • Gold bugs argue that because gold is priced in relation to fiat currencies, gold will therefore appreciate in value if fiat currencies lose their value.

Understanding Gold Bugs

The basic perspective shared by most gold bugs is that the price of gold will rise if the value of fiat currencies such as the U.S. dollar (USD) falls. Therefore, investors who are bearish on the long-term prospects of the USD may therefore also be bullish on gold. The term “gold bug” simply refers to the most adamant and outspoken among them.

In some cases, the term gold bug can be used in a pejorative sense, referring to an investor who is unreasonably confident that gold will increase in value. In this context, the term has a similar meaning as the expression “permabull”, except that it relates specifically to gold. For the most part, however, the term gold bug does not carry a positive or negative connotation. Instead, it simply refers to an investor that has become convinced that gold is likely to rise in value.

Rationale

For gold bugs, this apparent decline in fiscal health increases the risk that the government will respond to the rising debt burden by effectively devaluing the USD. For example, if the government were to default on the national debt—whether deliberately or indirectly, such as by failing to raise the so-called “debt ceiling”—this could cause the value of the USD to decline precipitously on international currency exchange markets, which in turn would cause the price of imported goods to rise for US consumers.

Alternatively, many gold bugs fear that the government will be forced to indirectly devalue the dollar even if they do not formally default on the national debt. For instance, expansionary monetary policy could cause inflation to gradually rise. This would effectively “inflate away” the national debt by eroding the real value of its outstanding principal. On the other hand, this strategy could have severe negative effects on the wealth and purchasing power of investors and citizens whose savings consist largely of USD-denominated assets. 

For gold bugs, therefore, investing in gold can be an attractive way to both hedge against these risks and profit from any potential USD devaluation.

Real World Example of a Gold Bug

There are many common arguments for this belief. To begin with, gold bugs often argue that the fiat currency system allows governments to engage in fiscally reckless behaviors such as relying on chronic government borrowing to finance persistent budget deficits. In the United States, for instance, the budget deficit in 2020 is expected to reach $1.1 trillion, which could reach or exceed the all-time record for the largest deficit ever recorded. In fact, the federal budget has been in deficit in 77 of the last 90 years, with the national debt exploding from roughing 30% of GDP to over 100% of GDP over this same timeframe.