It was a glorious thing to behold gold breaking into 4-digit territory. However, this glory was tempered by the unsettling feeling of watching the stock market tank and the dollar continue to spiral into the abyss of worthlessness. Gold investors will weather the storm, but it will be painful to watch the middle-class get squeezed, while the poor and elderly suffer as they rapidly lose purchasing power. I have been warning people around me to get out of their company-sponsored 401k “growth funds” or IRAs, and have been receiving a range of reactions from indifference to genuine concern.
Commodities are the obvious inflation hedge and have historically appreciated during economic downturns. But we have never seen the world’s reserve currency quite this sick or stagflation quite this threatening. In fact, stagflation wasn’t even believed to be possible my most economists prior to the 1970s. One of the many flaws in the Keynesian school of macroeconomics was to assume that inflation and stagnation would not occur together. Printing more money was the easy cure to a slowing economy and contracting the money supply would take care of inflation.
What happens when dumping boatloads of dollars into the economy does not stimulate growth? Stagflation is the name of the dilemma which exists wherein the central bank has rendered itself powerless to fix either inflation or stagnation. We only need to look back to the 1970s to get an idea. The global stagflation of the 1970s was largely started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession (stagnation), causing a runaway wage-price spiral. Sound familiar?
So with stagflation on the horizon, the logical question for investors is:
How do I shield my assets and profit during the coming collapse of the dollar and the stock market?
The short answer is to invest in commodities and short the stock market or particular sectors that are the most overvalued. But it is important to consider that any gains you might realize in U.S. stocks will be diluted by the force of inflation. After all, if your portfolio of U.S. stocks goes up by 12% in a year and the dollar loses 15% of its value in that same year, you just realized a 3% loss. The reality is far grimmer, as most investors have lost between 10-20% of their portfolio value over the last year. Add in the 15% inflation and many Americans have lost over 30% of their 401k, IRA or investment portfolio in the past year and are probably oblivious to the fact.
You can avoid the inflation issue by holding physical gold and there are certainly many hardcore goldbugs who advocate holding only physical metal. After all, paper is paper, and if the system comes crumbling down, you want to hold something tangible. While I share this concern, my position is a bit more moderate. I prefer to take advantage of the leverage offered by precious metals stocks and periodically convert a percentage of my profits into the physical metal. The approach captures the best of both worlds by maximizing returns and then using those returns to secure actual gold and silver, albeit at slightly higher prices.
The key is to overcome the inflation rate and find quality miners that are undervalued by the market. It takes a bit of grunt work, researching websites, digging through financial statements, evaluating feasibility reports and running comparative valuations. However, the reward is well worth the effort and pays for itself many times over.