Gold Bug

What Is a Gold Bug?

In economics, the term “gold bug” is a colloquial expression used to refer to people who 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.

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 who 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 fiscal year 2022 was $1.38 trillion, a decrease of $1.40 trillion from the previous fiscal year. The U.S. has experienced a fiscal year-end budget surplus, meaning when the government revenue exceeds spending, only five times in the last 50 years, most recently in 2001. The national debt has also exploded from roughly 40% of GDP in 1966 to over 100% of GDP in 2022.

The price of gold has increased in the past six months. Generally, the price of gold is moved by supply, demand, and investor behavior. 

When investors choose to buy gold and make a hedge against inflation, they drive up the price of gold. In addition to the value of the U.S. Dollar and market volatility, factors that influence the price of gold include gold production, jewelry demand, and gold reserves.

Economic slowdown and the fear of a recession causes investors to look for safe investment opportunities. Typically, during these periods, paper money loses its value as more of it is printed, and yet the supply of gold remains fairly constant. Because gold prices often increase when economic conditions worsen, gold is seen as a safe bet to diversify a portfolio.

The Bottom Line

A gold bug is an investor who believes the price of gold will perpetually increase. As fear of a recession becomes widespread, gold bugs typically look to invest in gold to make a hedge against inflation and currency devaluation. The term “gold bug” refers to the most adamant and outspoken among these investors.

Frequently Asked Questions