In fact, he said now would be a good time to drop any gold you’re still holding. “Get rid of it,” he said, and he detailed exactly why.
Since I tend to agree, and never really understood some people’s intense fascination with the yellow metal anyway, I figured it’s a good time to share my opinion too.
There will come a time to buy gold with both fists, but this isn’t that time.
Gold bulls tend to frame their arguments around three major points:
- Gold is an inflation hedge.
- Gold is a hedge against currency manipulation.
- Gold is a crisis hedge.
I actually concede the first two points. Gold is a decent store of value during times of inflation or currency devaluation. But that’s insurance we don’t need right now… a little like buying life insurance after you’ve died.
Let’s look at the numbers.
Since 2008, the Core PCE Inflation Rate – the Fed’s chosen inflation gauge, which excludes food and energy – has consistently been under the Fed’s 2% target. It’s trended higher for about a year and a half, but it’s still well below 2012 levels… let along pre-crisis levels.
Whenever I mention core inflation, I hear howls of protest. After all, by excluding food and energy, isn’t the Fed effectively cheating?
If we’re going to have a Fed… and if we’re going to give them a price stability mandate… then stripping out food and energy is the only sensible way to calculate it.
Let’s pick a grocery store item at random: a gallon of milk. (Yes, I’m the one person left in America that still puts milk – actual cow milk and not soy, or almond milk, or yogurt, or whatever happens to be trendy at Whole Foods at the moment – in his cereal. It almost feels naughty… and it tastes so sinfully good.)
In any given trip to the same grocery store, I’ve paid as little as $2.00 or as much as $6.00 for a gallon, with no real trend. The price bounces around based on very short-term supply and demand conditions.
You can’t – and shouldn’t – base monetary policy on something that volatile and noisy. So the Fed is only being reasonable when it excludes it.
So, inflation is tame at the moment. But it’s still bubbling under the surface, just waiting to explode higher, right?
Again, not exactly.
In fact, I’m a lot more worried about chronic deflationary forces.
Just this week, I read a story that British farmers are looking to invest heavily in robots to replace the cheap Eastern European labor that’ll no longer be available post-Brexit.
Over the long term, robotic labor is vastly cheaper than human labor, which ultimately means lower prices as human labor is squeezed out.
Look closer to home, at Amazon, Uber or any one of many smartphone apps.
Technology has made so much possible. But this is massively deflationary, not inflationary.
So I agree that gold is a fine inflation hedge. But until this automation revolution runs its course – and we’re still in the early stages – gold bugs are paying a high price to hedge against a nonexistent threat.
But what about currency manipulation? I agree in principle that gold is a hedge against a weaker dollar. But I see nothing right now that indicates the dollar will weaken, for a variety of reasons.
The final argument for gold – that it’s a crisis hedge – always makes me chuckle under my breath. Seriously.
If the financial system ever truly blew up – or let’s say the apocalypse happens and the future resembles “Mad Max” and “The Walking Dead” – we’re all going to be fighting over canned goods, ammo and gasoline. Gold really isn’t going to get you very far.
Being less dramatic, think back to 2008. When the bottom fell out and the market crashed, the price of gold crashed right along with it. The only things that held their value were the U.S. dollar and U.S. Treasurys.
If you worry about a crisis brewing, by all means, prepare for it.
Keep cash on hand and keep your debts manageable; people who had dry powder made out like a bandit in the aftermath of 2008.
And if you’re convinced the end of the world is nigh… well, I suppose you should stock up on canned goods, ammo and gasoline and store it all in a bunker in Idaho, complete with a lifetime supply of tinfoil hats.
But in no scenario do I see gold really having much value as a crisis hedge. Because as we saw in 2008, whatever value gold might’ve had in the past, today it’s just another financial asset.
And it’s perhaps time not just to drop any gold stores you have right now, but maybe even make a bet against it. Click here to see how we’re doing it.
Boom & Bust Portfolio Manager