I don’t really understand the blinders that some investors have about investing in gold. Those blinders may be on, or off – they may feel that gold is essential to prepare for the coming collapse, or they may feel that it’s a silly and useless asset with no commercial applications. But the passion on the topic is always awfully high. That makes no sense to me; I just can’t get my mind around it. I mean… no one feels that way about T-Bills and they don’t pay any interest lately either.
For a long time I’ve been one of those guys who says that if western civilization really does collapse the only commodity worth anything will be bullets. I mean… what are your gold coins really worth to you when you have the muzzle of my AK47 up against the side of your head? If you really want insurance for a total collapse, you would be better off learning combat skills, or how to make beer or something. gold would be nice too, but you had better be sure you can keep it.
Gold is a hedge against inflation of course, like all hard assets are. What’s more, if things go all Zimbabwe on us you can more easily slip across the border with it in the middle of the night, unlike real estate or oil. But the critics of the inflation hedge view will usually line up the chart of gold against the chart of inflation and show that it doesn’t line up perfectly. There is a lead – lag relationship they're ignoring, and a one dimensional look at the past might not show it. But even more important is what you think of as 'inflation'. the official statistics use price inflation only, while professional investors (and Milton Friedman devotees) usually think of inflation as a monetary issue, and see the price and wage inflation that follows it as secondary. If you believe that there is no connection between money supply and price inflation, then you probably don’t think much of gold as an inflation hedge.
Even guys that I largely respect are missing the mark in my opinion, on what gold is really about. For instance, Rick Bookstaber generated quite a fuss on zerohedge when they revealed his view that gold is in a bubble. I worked very closely with him for years and Rick is a very smart guy – but like many many others, I think he’s missing the mark here too. To believe that gold is in a bubble (a term he apparently is as willing to misuse as anyone else) you have to view it strictly as a commodity. From that perspective, the ready supply and anemic commercial demand of gold doesn’t come close to justifying it’s current price. But if you look at is as a currency it’s a completely different story.
That’s the way I’ve always seen gold… as a currency. Gold is as great a hedge against inflation as any other currency except the supply is more stable. The Dollar may be strong against the Euro all other things being equal, but either the FED or the ECB can change that dynamic without any notice. The inflation rate may be constant, but the exchage rate will change because the supply of one currency or the other was specifically altered. But gold has to be mined, and it's therefore less subject to political whim than the money supply.
That's the key to how gold is viewed in the hedge fund world. The people who are buying gold now are thinking of it as a hedge against all currencies. Given the horrific mismanagement of public finances, virtually every developed country is going to have to use some measure of inflation to manage their cost of funding. Increasing their money supply will help keep their interest rates low. But since all countries will be doing the same, it probably won’t effect the currency exchange rates nearly as much as their interest rates. The people buying gold are counting on that, and if that scenario plays out, the price of gold is still due for a substantial increase.
It won’t be a straight line so if you don’t have a tolerance for draw down, don’t buy it. But competitive devaluation is the real gold story these days. And if you get that, then you get gold.
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