Why I Hang Onto My Gold Portfolio

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Includes: AGOL, GLD, IAU, OUNZ, SGOL
by: Katy Delay

Summary

Surface data seem to point to an invigorated economy, but they are misleading.

Contradictory economic phenomena, financial turmoil, and worldwide political instability are perpetuating a hazardous environment for investors.

Gold-related investments would seem to be safe havens in such turbulent times.

Optimism is reported to be everywhere. GDP for the fourth quarter of 2014 is a reassuring 3.2%. Official unemployment is down to 5.6%. Consumer sentiment: 92.6% out of 100. General price inflation: down 0.4% in December, up only 0.8% for the year, and Core CPI less food and fuel up a benign 1.6% annually, pretty close to the Fed's benchmark.

So all is well with the world. Maybe I should sell my gold investments and move back into the civilized world of Modern Portfolio Theory. But wait a minute -- why do I still feel like I'm about to go over a cliff?

Well, here are a few good reasons for this unease from a number of reports, including the one that gave us some of the good news:

  • Food prices are up (again) by 0.3% in December alone. That's 3.6% annualized. Of all CPI figures, this is the one that hits me the most. Meat is at the top of the list.
  • At the same time, grain prices have tanked, even below the cost of production. These extremes are certainly mysterious and probably destabilizing.
  • Shelter is up 2.9% for the year, hitting the renting classes, not the wealthy.
  • Medical care is up 4.8%, the most since 2013, here again hitting the sick and the old.
  • Gasoline is way down, great for consumers, of course, but breaking the back of new and old petroleum producers. At the same time, natural gas is up 5.8%.
  • Savings accounts are paying less interest than ever, around 0.81%, even with food prices and shelter up as described. This again hurts the elderly who don't dare or care to risk everything, or even anything, in junk bonds and stock-market casinos.
  • What about education? Do I read this page correctly to mean that average college tuition at four-year public colleges has increased 13%? I pity the students of today. What a miscarriage of justice is this whole student-loan fiasco. Another perfect example of government run amok due to unintended consequences.
  • Unemployment is apparently in the eye of the beholder, because U-3 may be at 5.6%, but U-6, another parameter used by the BLS, is well above 10%. The CPI likewise is underestimated, according to ShadowStats, which puts it closer to 8%.

That's enough about stats. What about danger signals in financial markets?

  • This site gives us a very scary article about manipulation in the gold market, but which may signal an opportunity. Likewise, one of the article's charts says a lot about the dollar vis-a-vis the leverage ratio in the gold market. The implication is that gold is undervalued.
  • The dollar's sudden rise cannot be good for exporters, nor can it be good news for the carry trade and other foreign dollar-debtors. And I doubt the Fed sees the rise with glee either, given its intention to raise rates soon. It doesn't want to kick the dollar up too quickly too far.

But does the Fed really control anything? Which brings me to my next point:

  • Expectations that the European Central Bank will start its own Quantitative Easing program is scaring the bejesus out of Switzerland, Denmark, and Sweden. Huge inflows of money from Russia, Italy and Greece forced the Swiss central bankers to abandon, without warning, their strategy of pegging the franc to the euro, even though the bankers now say they will defend the franc's weakness (sic), if necessary. First of all, that makes no sense. And secondly, the global ramifications of this central-bank-about-face are unsettling, not the least because of the implications for US policy. Citing Jeremy Cook from World First: "...the [Swiss] retreat was a 'total capitulation' in the face of forces that are too big even for a central bank with plenty of firepower. 'Nobody wins when you stand in the way of a freight train, except for the train.'" Ms. Yellen, take heed.
  • Stock markets are in ridiculous bubble territory. (See here, too.) Some may disagree, but even the fact there's a serious debate is disquieting.
  • The Fed is beginning to worry about when to increase rates, while it and others are now also worrying about not increasing rates.

Add to all of this some depressing global news...

... and you have a few reasons to worry.

So wipe that silly grin off your face, start hedging, and hold onto your gold investments. Looks like we're in for a wild ride.

Disclaimer: The author is not a financial advisor and is not attempting to give financial advice.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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