Wednesday, I wrote about why gold miners had underperformed gold. Part of the reason is that when there's a short run up in gold (GLD) prices and then a crash, gold can be profitable while the stocks won't be profitable -- it's just part of how the evaluations work.
You buy miners before an upwards wave for the underlying metal price, and not during, at least if you want as much of a return as possible. The reason is simple: Gold miners have to predict the price of gold way in the future, while gold spot prices are all about absolutely right now. It's a long-term vs. short-term analysis.
Either way, today, Peter Schiff wrote an article republished at Resource Investor, in which he said:
I've seen markets like this before, and by making some reasonable inferences, I have a good picture of how this could play out. Gold will continue testing the $1,600 barrier until it surprises to the upside. This could be spurred by the announcement of QE III, a calming of fears in Europe, or any shock to the Treasury market. Treasuries have temporarily overtaken gold as the primary safe-haven asset. Once that dynamic is broken, I believe the counterflow into gold will be tremendous.
Right now, there is a haze over investors. Frightful news from Europe and a slowdown in Asia have shaken confidence in any asset that doesn't have the steady track record of U.S. debt. But as I often remind my clients, past performance doesn't guarantee future results. Any news that wakes investors up to the coming collapse of the Treasury market will likely trigger a rush into the one asset with a track record as long as civilization itself.
This is fairly typical pro-gold talk from a short-term inflationary position. But is it right? Not necessarily.
The Dollar Compared To Other Currencies
The dollar isn't a weak currency compared to most other currencies with some exceptions, and the sheer level of collapse necessary isn't remotely close to occurring. We're at least a couple of years away from a recessionary crash in which the economy grinds to a halt -- assuming literally everything that could go wrong does go wrong. This means that the dollar will be one of the last currencies to completely tank even when things do go south. In the end, the dollar's fundamentals are better than the fundamentals of most other countries in terms of debt-to-GDP ratios.
Even then, the central bankers have consolidated an incredible amount of power in the last several years. Printing just enough money to cover basic losses and buy toxic assets alone isn't enough to trigger complete monetary collapse until the entire economy just stops.
Even in such a crash-oriented situation, people will still flood to dollars. Maybe they shouldn't. Maybe it's stupid over time. But there's a reason short-term Treasuries were bought so strongly in 2008, pushing the price up substantially in the midst of the crash. Just look at charts for the iShares Barclays 1-3 Year Treasury Bond ETF (SHY).
The system isn't salvageable through money-printing, but we're still in for a long bumpy ride down the path of wealth destruction and economic chaos. It won't be short and dramatic. It'll be long, boring, and tragic. What a waste.
What This Means For Gold Investors
As I've told people in my own newsletter dozens of times, I don't believe gold forecasts anymore than astrology. I just buy and hoard. I'm probably the epitome of what Buffett hates about gold investors -- my goal is to get a pile of the shiny stuff. I'm not interested in gold miners because of the far greater risk and technical difficulties with those assets.
I'm just as worried about a deflationary economic collapse as an inflationary one, which is why I still buy gold no matter what kind of bad news I see. I'm not buying gold to get rich. I'm buying it as a kind of insurance. That requires a fundamentally different strategy of passive purchasing and holding.
Hyperinflation in America isn't going to happen anytime soon, and while that might make gold prices vulnerable to more drops, just look at it as a huge buying opportunity for the economically literate.
Disclosure: I own physical gold and silver, and will be adding to my position regularly.