I’ve been a big believer in gold for some time now, and I’ve been talking about the potential for strong inflation for several months here at Forbes. Gold and inflation are so correlated in my mind that it makes no sense to load gold with potentially extended inflation period gold assets, which in my view would at least dilute money in the US and Europe by 50% over a 3-5 year period. The upside of inflation is much higher than that, but I think inflation will be all that is needed to realign nominal GDP and deficits. If it swells as a country, GDP grows and tax dollars grow but debt arrears shrink as a proportion of GDP.
The ideal agreed point is government debt at 85% to GDP because this is the area where growth is not hampered by public sector debt. To get an economy there after a shocking bout of unbridled spending, which is usually caused by war, but in this case the plague, the state inflates the debts of the past and uses inflation as a flat tax on the future.
This isn’t a revolutionary analysis, it’s just a story of post-war inflation long ago. You might of course go on a multi-year austerity campaign – yes, that simply won’t happen.
So inflation is what we have and what we are going to get more, and of course it is gold that will rise among other hard assets because when the value of money goes down, the nominal price of the hard assets goes up.
This is as basic as an investment. Buy gold! (And I have.) but Gold is not binding. He will not go to the moon.
How could it be! Gold hasn’t done badly over the last 20 years of course, but this inflation is a new thing, so it should pull gold higher. Instead, gold is practically weakening.
Some explain this by saying that Bitcoin is the new gold and therefore gold is obsolete. This is believable, but in reality the rich who need an inflation hedge are the elderly and the elderly tend not to be tech savvy and certainly not likely to be keen on navigating the murky crypto landscape of wallets, decentralized exchanges, and the technological entanglement that is bitcoin and currencies encrypted.
Bitcoin may be an alternative in some areas to gold and gold can be an embarrassing asset to buy and hold, but there is no lost desire for the yellow metal.
It’s confusing. I of course go back to my younger days in the 1970s when inflation took off, and so gold exploded. This is what I’m programmed to expect.
What is different now? The answer is nothing and “nothing” may explain why gold is not connected to inflation.
Here is a diagram that might be the key:
Gold outperforms x2 inflation, which is what we’re looking at, but the interesting thing is that while inflation is reliably trending better, increasing every year, 1974 and 1975 are the two years that gold actually goes down while rising inflation.
This was a surprise to me. It also clearly shows that gold can be relied on over the long term to protect against inflation but not from week to week.
You might say that gold doesn’t track inflation, but instead, like other commodities, it stays dormant and then explodes.
This is what I think we see. There are a lot of zooms in the markets. It might be natural gas one week, nickel the next, bitcoin and then the S&P 500. That’s what participants are chasing after. The assets are taking their turn in a vertical movement and this is where we are with gold.
Nothing will happen because no one cares about gold, until all of a sudden everyone does. Then verticality will work. When that happens it will happen quickly.