Before I had the chance to address a recent Gold-bashing piece (Gold isn’t the best protection against inflation), Bloomberg is out with another anti-Gold piece (Gold Buying By CB’s May Send Sell Signal). The amount of misinformation in regards to Gold is bothering me and so too is this disinformation campaign, courtesy of Bloomberg.
First let’s talk about Gold as protection against inflation. Gold is the best protection against inflation over very long periods of time. We are talking about decades and centuries. An ounce of gold today would buy the same amount of goods in 1900 and 1500- and probably in 100 years time. It is very volatile over shorter-term periods but over multiple decades and centuries, it keeps its value.
Over such shorter periods, things like land and commodities usually perform better. In a reflationary period, such as what we had in the mid 1930s and mid 2000s, commodities and stocks perform better than Gold. So I agree with the general point, however the author makes some crucial mistakes. First he utters some typical anti-Gold nonsense:
In reality, gold has a mixed record. Nor should you be surprised about that. A few industrial uses, and jewelry, aside, gold is valuable only insofar as other investors think it is valuable. By itself it isn’t necessarily worth anything. Nor does it generate interest or dividends. If the price doesn’t rise, you don’t get anything.
If it isn’t worth anything then why has it kept its value, over time, unlike every other currency? Gold rises for a reason. It rises when people are concerned about paper money or the financial system. And what can bring about such concerns? Too much debt, funding problems, credit problems and easy monetary policy. This anti-gold argument would have you believe that it only rises randomly or based on human emotion. It is just drivel and nonsense.
The second point is that the author is assuming we are going to have your typical inflation.
As we move into the early stages of an inflationary era, those five assets should do at least as well as gold, if not better.
We already have inflation. The distinction is if we are going to have reflation or hyperinflation. As stated previously, reflation is better for stocks and commodities than for Gold. Hyperinflation occurs, not because of printing too much money and overstimulating the economy. It occurs when there is monetization of debt. We are going through a slow motion hyperinflation, where the Fed has to monetize not constantly but somewhat consistently. The same for the UK and perhaps for the European Central Bank. That environment is best for Gold and Silver and not for commodities. We may get a reflation eventually, but for now we are in a slow motion hyperinflation.
In regards to Central Banks, most of the CB’s that are buying are from emerging market countries. Nations such as China, India and Russia have such a small percentage of their reserves in Gold and a large percentage of their reserves in US Dollars. Their buying of Gold is prudent and hardly does anything to imply a top in the market.
My favorite quote is this one:
“This is late in the game to be buying gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and former economic adviser to the U.S. government. “Central banks are not known for their investment acumen. What it reflects is a lack of confidence in the U.S. economy and the long-term durability of the dollar as a store of value.”
If it reflects a lack of confidence about the dollar as a store of value, then why is it late in the game? And Central Banks are not investors, they are a backstop. Whether their timing is good or bad, they aren’t going to sell anytime soon. Bloomberg just found another anti-Gold fellow to spout an anti-Gold comment.