Insights & Advice

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Gold, the bug, and you

If there was ever a time to flee to safety, the Pandemic of 2020 is a great excuse. Stocks tumbled, bounced back, tumbled again. The bond and credit markets have been in disarray. Yet, few have even mentioned the precious metals market as a place to be.

Even writing about gold in this age of Zooming, digital breakthroughs, 5G technology, and the like, seems anarchistic. The precious metal has been relegated to an obscure corner along with conspiracy theories, old warnings, and a small group of goldbugs who trot out “end of the world” warnings on down days in the stock markets.

You usually see these ads to buy gold every time stocks fall 10% or more. I imagine they do a good business, although by the time you get around to buying that coin or other investment, gold has already spiked so high that you are left holding the bag (or coin, as it were). I mean really, the theory that you should hold some of the metal just in case the world ends does not make any sense, unless you have it buried in your backyard.

If society did collapse, that gold you were holding in some bank vault would be inaccessible. The coins under your pillow would be stolen or worse since there would be no law and order anymore. Besides, there are better safety trades—U.S. Treasuries bonds and the U.S. dollar come to mind.

And gold is costly to hold. It pays no dividend, but there are charges to safely secure it, hold it in a vault, or whatever. These costs are based on the prevailing interest rates at the time.

The other argument is that gold works well in inflationary environments. Have you looked at the rate of inflation, lately? It has been around 2.5%, or lower, during the last decade or more and seems to be falling further in this recession. Plus, in this pandemic, the demand for gold jewelry by the global retail trade has also fallen off. That should be no surprise since demand for most luxury goods have been hit hard by COVID-19.

I believe I have outlined the bear case in gold fairly well. But riddle me this: gold has gained 25% since I last suggested that readers keep 2-5% of their assets in this precious metal? That was back on February 15, 2018. In the meantime, I took a look at the performance of the stock market during that same period. The S&P 500 Index, as of today, is up 1.79% in comparison.

Yes, despite all the naysayers and the ridicule that advocates of gold have endured throughout the past two years, gold seems to have been the place to be. Why, therefore, were all these so-smart investment advisors wrong? For one thing, they have little to no long-term investment experience. Most of them were in diapers back in the seventies and eighties when inflation was a very real and dangerous variable in the investment world.

The second, and even more important reason, is that they are having difficulty understanding the new world of practically zero interest rates, plus the impact of a tsunami of global monetary stimulus.  The best they can do is watch the results of these trends play out and react accordingly.

Given the global financial environment, therefore, where does gold fit in? While inflation is dropping, and the dollar keeps climbing, the bond market vigilantes are betting that here in the United States interest rates are heading toward negative rates of return. For gold holders, that means the cost of holding an ounce of gold is expected to drop to at least zero, if not lower.

At the same time, as government deficits balloon, gross domestic product declines, and tax revenues fall, the need to keep interest rates abnormally low (just to manage the interest payments) becomes extremely important. In an environment like that, how long will it be before investors figure out that the dollar is vulnerable to weakness?

There is an inverse relationship between the U.S. dollar and the price of gold. Right now, however, because COVID-19 continues to rage throughout our country and the world, investors are buying both the greenback and gold. Once the fear subsides, and the pandemic hopefully subsides, the country could be left with a long, protracted recession, huge debt, and a weakening currency. In the past, when this happened in other countries and regions, the only answer for governments was to inflate their way out of this kind of predicament.

Whether that will happen here in the U.S., as well as around the world, is just one possibility among many. But the mere thought that this scenario could play out is enough to keep gold interesting. If I were you, I would hold on to that allocation I recommended.

Posted in A Few Dollars More