Kitco ran a piece yesterday questioning the value of gold as an inflation hedge:
““Gold is often touted as an inflation hedge, but is that truly the case? Gold’s rally from 2001 to 2011 coincided with stable core inflation of around 2%. By contrast, from 2021 to 2023 when the U.S. economy experienced the steepest surge in inflation since the late 1970s and early 1980s, gold prices barely budged,” Norland said. “So, if not inflation, what really drives gold? And what should investors expect in 2024 and 2025?””
Spot the flaw in this? There’s plenty to choose from. Norland, someone clearly in a position to know better, questions gold as an inflation hedge. There are a couple other assumptions he should question first.
Let’s look at assumption that the “steepest” inflation surge occurred in 2021-2023. What do you suppose that’s based on? Certainly the CPI surged most during that time frame, but as an indicator of inflation, instead of questioning the timeliness of the CPI, he questions the timeliness of gold. Not possible that gold was right and the CPI was wrong?
Though Norland makes no mention of it, you would have to have been living under a financial rock not to be aware that in March 2020, the Federal Reserve unleashed a multi-trillion-dollar inflationary blitz. ZIRP forever and QE out the wazoo. Gold prices in fact responded impressively. surging over 35% by August. This extended an earlier rally that began in late 2018 as the Fed backed down on its first attempt to normalize interest rates since the GFC in 2008.
The possibility that gold was timely and the CPI was late seems not to have occurred to Norland.
What do you think? Gold isn’t a good inflation hedge? It responds before the inflation happens? Or the CPI lags inflation?
This theme has many corollaries. Another one just popped up this morning.
A CNBC headline reads:
Stocks rise after GDP report shows strong growth and slowing inflation
This is a result of consumer inflation stats lagging actual inflation. Because inflation is systematically underreflected in the early going, even relative to the usual understatement, inflation always looks like growth at first. A new inflationary impulse has entered the pipeline over the past three months, most obvious in asset prices.
I have come to the conclusion that in the very long term, gold is a hedge against inflation. Just based on the nominal gold price alone, the U.S. dollar has lost 99% of its purchasing power since 1933. That sounds about right if you look at prices for many goods and services from the Roaring 20s and compare them to today. In “It’s a Wonderful Life,” Mr. Potter attempts to get George Bailey (Jimmy Stewart) to join his company and tries to entice him with money. “How much do you make, George? $1,000?” “$2,000!” Multiplying those numbers by 100, Potter assumes that George earns approximately $100,000 but George actually earns $200,000. Those numbers seem reasonable today.
In the short term, gold is a hedge against monetary (or global monetary system) mayhem. With every event that poses a risk to the existing monetary system, gold rises in price (oftentimes temporarily), rising more the greater the perceived risk. If a bunch of NATO countries suddenly joined the One Belt One Road trading bloc headed by China and spoke of shunning the stupid military adventures of the U.S., I would expect gold–perhaps temporarily–to skyrocket as economic isolation of the U.S. could cause a severe drop in the purchasing power of the U.S. dollar relative to other currencies.
Interesting way of looking at it, Milton. Based on TV shows and movies from the fifties and sixties, my rule of thumb is multiply by ten for fifty-sixty years. That is, the value of the dollar is about a tenth of what it was fifty-sixty years ago. Just a rough guide, but it’s held up pretty well for quite a while.
Gold itself would be an excellent guide except for the messy action in the twentieth century, most notably its real loss between 1980-2000. Out-depreciating depreciating fiat for two decades is a tough trick for real money to pull off. I attribute it to the beach ball effect … having been held under water by the full weight of the United States for decades, it soared too high on release … by the end of the seventies it was in a bubble that took two decades to work off. Strong supporting evidence here:
Copper & Gold
From an investing point of view overall there is a cycle to it. Stocks and gold take turns as the leading inflation hedge. In the seventies it was gold, in the eighties and nineties it was stocks, then in the oughts, gold, etc. The two together are more reliable than either alone.
The connection between currency debasement and stupid military adventures is practically timeless. If governments had to send a tax bill to voters to cover the costs of war, there would be very few wars. Even if they had to borrow and repay, there would be fewer wars, because the tax bill would still have to be paid. So it comes down to borrow and print. That is, inflate … central banks are the great enablers of war. It’s likely no mere coincidence that ours was created just before World War I. The seventies inflation can be traced in no small part to the Vietnam War. Then we had Iraq, Afghanistan, Ukraine, Hamas … the more activist the central banks, the less worthy the military adventures become.