In a piece on MarketWatch today, Mark Hulbert looks at the question Does gold belong in a retirement portfolio? He notes that many retirees and would-be retirees apparently think so, as gold has become an increasingly popular retirement holding. As a prime motive, he presumes that they are doing so to protect against inflation. Having made this presumption, he cites a study by the Cleveland Federal Reserve, which has a model that says “that expected inflation is just 1.16% annualized over the coming decade”. Apparently he also presumes the agency that issues the Federal Reserve Note – aka the US dollar – to be objective and unbiased about its prospects.
But for the sake of argument, let’s assume that the Cleveland Fed forecast turns out to be correct. What exactly does this mean? According to Hulbert, its model is based on “Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations”. Treasury yields, however. are manipulated by the Federal Reserve (Try a search for “forward guidance” and “yield curve control”.). And although Hulbert doesn’t think it’s worth mentioning, “inflation data” usually refers to the Consumer Price Index (CPI), and in the case of the Federal Reserve’s preferred measure, the Personal Consumption Expenditures (PCE) deflator. Hulbert doesn’t consider the possibility that many of these retirement investors might not trust these government statistics to accurately measure inflation. In fact, the CPI wasn’t even designed to measure inflation. Like the name says, it’s a measure of consumer prices. And more than a few investors believe that it doesn’t even honestly do that. And not even the BLS, which publishes the CPI, purports it to represent consumer price inflation for retirees … it actually publishes a separate measure, the CPI-E, expressly for that purpose. You suppose the Cleveland Fed study considered that? I didn’t think so.
In fact the “inflation” rate that the Cleveland Fed is forecasting, isn’t factually, objectively, “inflation”, but the rate of increase in the Consumer Price Index. Hulbert makes the tacit assumption that they are one and the same, without bothering to support it.
Hulbert further argues that investors incorrectly feared inflation last time the Fed launched big monetary stimulus in response to the 2008 financial crisis. But recent Fed action has dwarfed that stimulus, with the amount of debt monetization in weeks exceeding years of that era, with more likely on the way. Yet despite mild official inflation readings, gold rallied massively anyway. Whether or not the government reported big inflation, owning gold worked regardless, more than doubling between 2008 and 2011.
Hulbert further doesn’t address the possibility that a big reason behind gold’s increasing popularity with retirement investors is the historically high valuations and high prices of financial assets (stocks and bonds) and their lack of yield. As a real asset, gold offers diversification potential that is attractive to many investors. This is a curious oversight given that Hulbert himself writes regularly on the high valuation of stocks and bonds, calling attention to the low prospective returns. Is he now saying investors are unjustified in looking elsewhere?
Even after acknowledging that bonds have virtually no yield any more (and at today’s prices, stocks don’t offer much either), the argument against gold for lack of yield has lost its punch. Instead, Hulbert only measures the value of the low yield argument against the low inflation argument, rather circularly inferring that both must be flawed, glossing over that it’s real, not nominal, yields that are the operative factor.
Investors may also have noticed that (because of high stock valuations) gold has outperformed stocks since the beginning of the century, an impressive performance record Hulbert doesn’t consider.
Most of Hulbert’s articles are well supported with facts and reasoning. When he addresses gold, why he would make a case so full of holes is something only the reader can guess.