ABG

Gold: Not an Effective Hedge Against Inflation

The author arbitrarily uses 1980, at the top of the 1980s market cycle, to support the idea that gold is a bad hedge against inflation. But, we are near the bottom of the gold cycle right now, not the top. The last 8 years of gold's appreciation happened in a time of deep calm and steady economic growth. It was not the result of fear and panic, as in the 1970s. The first year of panic was the second half of 2007 to 2008. So, the gold cycle is now just beginning, not ending.

Arbitrary choice of 1970, at the bottom of the 1970s gold cycle, as a date upon which to base an analysis will give a completely different picture, compared to the choice of 1980. The price for gold on the Swiss market was $42 per ounce. If you had bought gold in 1970, keeping it stored in Switzerland (because Americans were not allowed to own bullion until 1974), you would have had incredible gains to date, exceeding the official measures of inflation.

Of course, there would have been yearly storage charges, but, if you owned the S&P 500 index, you would have needed to pay taxes on the dividends, and on all the sales that you are constantly forced to make when various stocks are removed from the indexes. If you owned a passive mutual fund, you would have been more seriously impacted by taxes.

If the index creators just left all stocks on the index that started on the index, and never got rid of the dogs, your gains in stock investing would be non-existent. So, companies are always added, and removed, and funds that follow the indexes, or you, need to buy/sell in sympathy with these moves to keep your portfolio consistent with the index. This creates taxable events, and taxes reduce return. In comparison, gold is not taxable until it is sold. Most people never sell it, so the capital gain is never taxed.

At any rate, after taxes, you would have had a much bigger gain from a static gold investment, dated from 1970, than from investing the same amount of money in the S&P 500 in 1970.

That is not to say investing in the stock market is a bad idea. It is simply a bad idea at this moment in time. There will come a time for stock investing, but not is not that time. Right now, smart people will opt for gold. Even though the stock market will go up a lot in the next few years, from current depressed prices, all of these gains will be for show only. They will likely be merely nominal gains, even though I do think we will be seeing DOW 30,000 by 2011.

Because of the circumstances that surround us, over the next 5-10 years, stocks will arise primarily out of inflationary pressure created by the Fed in its quantitative easing program. In other words, after adjustment for the reduced buying power of the dollar, stock gains will be non-existent, at least for many years. Gold, in contrast, will probably go up in real terms, because of the increased levels of world instability, a continuing decrease in mine production in spite of higher prices, and simply that almost everyone wants at least a little bit of it (whether in bullion or jewelry) and the world population is growing much faster than the world's stockpile of gold.

Coming Inflation To Boost Stocks, Gold

It would have been more accurate to call the "Predictions" section of this article "Numbers I would not be surprised to see." It is, of course, impossible to exactly predict future events, but, as a general idea, I think the nominal number estimate will, nevertheless, prove fairly accurate. Remember, nominal numbers must be converted to real numbers, by appropriate inflation adjustments. Failing to adjust those numbers is one way in which statistics can be used to lie to people.

The reason I have used nominal numbers is not to tell you that the stock market is going to be the absolute best place for your money. It won't be. Rather, it merely illustrates that money in the stock market will do a lot better than money stashed in a bank account, under your mattress, or in bonds. The worst possible long term investment, right now, in spite of the current cash mania that has temporarily engulfed the world, is cash.

Coming Inflation To Boost Stocks, Gold

You are describing real values for the DOW, not nominal values. Neither the real value of gold or the DOW will jump as much as the nominal value. Indeed, DOW 27,000, three years from now, assuming the level of inflation is consistent with that described in the article, means a real value in line with your prediction, after subtracting inflation.


On Nov 05 08:47 AM Beabaggage wrote:

> Ridiculous to believe that inflation, especially the 70's -80's type
> inflation we are in for due to the massive monetary stimulus going
> on that has no end in sight, will be good for stocks. Gold/Oil/Commodities?
> yes. Stocks? heck no, we are looking at Dow 4500. People are still
> far too bullish, thinking it's over it's over. it is not. The massive
> stimulus will just make another bubble and you can bet it will be
> spent on hard assets. This actually may be good for realestate.
> Would you rather own a hotel or Kellogg Stock trying to raise prices
> to keep up with soaring costs? The monetary base is growing exponentially.
> This plus federal stimulus world-wide, low interest rates and shrinking
> sources of commodities and food will make the next decade the most
> inflationary of all time. Loss of faith in company financials and
> management will push people into cash, with rates low, they will
> start to chase yield, great for oil, gas, other commodity stocks
> with good yields.

Coming Inflation To Boost Stocks, Gold

It is far more difficult to predict the price of the DOW or gold or anything else, tomorrow, than it is to project forward for 3 years.

Coming Inflation To Boost Stocks, Gold

I don't think it is impossible to predict approximate minimum prices, several years forward. The current price of gold could have been calculated in 2000, simply by taking the money supply in 2000 and increasing the price for 8 years, in line with the increase in the money supply. Then, one could have simply added a modifier in the form of two smaller factors -- increased world political instability, increased difficulties in mine production due to the exhaustion of easily tapped mines. The same is true for the DOW, prior to the current crisis, except that, with the DOW, you would exclude the political instability factor.

Since it is almost certain that current money supply trends will continue, or become more pronounced in an Obama Presidency, it is rather simple to predict the minimum gold price in three years. The unpredictable events are where the + symbol comes into play...


On Nov 05 09:47 AM Rhett wrote:

> Nobody but nobody can come close to projecting the price of anything
> in 2012. But for now, gold is about to jump. You heard it here first.

Coming Inflation To Boost Stocks, Gold

I-Bonds are tax deferred for up to 30 years. That is a long time for Hank Paulson to wait for his money.