Disclaimer: I am not a licensed securities dealer or adviser. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.
Personally, I find the hype for gold usually overdone. While I agree with the traditional argument for a gold standard instead of fiat money, it tends to have a lot of unwarranted promotion. On TV you routinely see commercials promoting gold, both in good times and bad times. Some have turned out to be scams. But gold can be a good hedge against government intervention, inflation, and a terrible equities market. However, it is still subject to the forces of supply and demand.
Gold is a safe haven when the US dollar gets weak, and something to run from when the dollar is getting stronger. With the Fed increasing the interest rate, the monetary supply decreases and the US dollar gets stronger. This has caused gold to go down significantly. But as I showed in a previous post, the stock market only has the appearance of rising, since it is directly related to the monetary supply (yes there are some other factors, but they do not have as strong of a correlation). Now that the monetary supply will start shrinking, it would make sense that the stock market is set to shrink with it, regardless of what the dollar does. However, like something out of Looney Tunes, the market usually keeps running for a bit before it realizes that there is nothing left to support it.
The misallocation of capital has been occurring for many years now, especially since Reagan’s advisers convinced him to replace Paul Volcker with Alan Greenspan. Republicans thought Greenspan would bring the Fed back to being a Banker’s Bank, continuing the work of Volcker. Greenspan was thought to be a gold standard guy, and favored famous capitalists like Friedrich von Hayek and Ayn Rand. Indeed, he wrote about the gold standard. However, once in office, he apparently discarded those beliefs in favor of Keynesian economics and all its fallacies. Greenspan caused the Dotcom Bubble and the Housing Bubble through his monetary policy, which was certainly aided by government intervention in these sectors.
Warren Buffett is called the “Oracle of Omaha” due to his success as an investor. However, the vast majority of his wealth is due to actions of the Fed, not insight to investing. There’s no mistake that Buffett’s wealth skyrocketed post-Volcker and with the “dovish” actions Greenspan and Ben Bernanke. This is not to say that Buffett is not a good investor, after all he was a billionaire before he was lent a helping hand, but he is not as successful as many think. And the kicker is Buffett stopped short of admitting that the Fed is the reason he is wealthy, but thanked Bernanke for keeping his financial empire alive.
Since the Fed started this path of Keynesian manipulation, approximately $45 trillion worth of fiat credit has been introduced. The Fed was able to “correct” busts quickly by adding fiat credit to the market, depleting real savings. This has gone on for so long that we have reached what former OMB Director David Stockman calls “Peak Debt,” meaning that the Fed can no longer trick the markets into “correcting” anymore. Many Americans no longer save, but live from paycheck-to-paycheck. Americans borrow first instead of save, putting them into a worse financial position. The Fed can no longer draw on real savings, which is why this has been one of the slowest recoveries, if you can even call it a recovery. Between the lack of consumer savings and the running up of Government debt, real resources that can be employed are hard to find.
With the 2008 crisis, the Fed engaged in behavior that was unprecedented, using the largest economy as a guinea pig to see what would happen. Strangely, instead of boasting about their success in boosting their economy, Keynesians talk about how much worse the economy *could* have been had they not intervened. That’s right, their success should be determined by something that never happen, nor could we ever know if it would happen. Personally, I prefer to measure success by things that really do occur, not markers that are left to the imagination. The Fed has been at zero or near zero interest rates for a very long time, feeding an equities and bond boom. There is no way this is sustainable, and as the interest rates continue to increase, the actual health of the economy will be revealed. Gold may be the best place to go to fight off bond and equity crash.
Currently I’m bearish on gold. Right now I’m waiting and watching. If gold gets below $950.00, I’ll get in. Some are whispering that it will get down to $850.00. But wait, you may say, didn’t I invest all my savings in water? Yes I did, and it’s still there. However, I plan on doing what I used to do when I invested, borrow money from the bank. Risky, and probably not advisable, but I’m doing it nonetheless. If I’m bearish on gold right now, why am I thinking about buying it and holding it? I’m just keeping an eye on it right now. I’m looking forward to it going down more due to the surge in the US dollar, the current interest rate hike, future rate hikes, and a stock market that keeps rising. In addition, the demand for gold is down 10%, jewelry is down 20%, and investment is down 44% as investment funds are dumping the stuff. In addition, the supply of gold is up 4%, but mine production is down 0.5%. A growing supply has been a trend in recent years. Overall, that means that there is low demand and too much supply, which will cause the price to go down further. I think in the future gold will go up as the Bank of Japan, European Central Bank, the People’s Bank of China, the future bust of the equities and bond markets, and Trump’s belief in Hamiltonian and union policies all start to play out.
If I do buy gold, my portfolio will only have a Water ETF, and gold. Not much diversification. But as famous investor Jim Rogers stated, diversity will not make you money. Diversity at best preserves wealth. Many advisers will say that my method is ill-advised. In fact, one reader of my articles stated that no adviser would condone such behavior, and that people are better off diversifying. To that I say people who have no idea what they are doing are better off diversifying. But to make actual returns above the market, rather than preserving your wealth, diversification is not the way to go.
For the past couple of years, buying gold has been advertised everywhere. But finally those commercials may be right, but not just yet. If it gets below $950.00, I’ll take a trip to Shiner, Texas to Texas Precious Metals, and perhaps the Shiner Brewery as well.
Learn more about investing in commodities and support this blog by purchasing Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market. I also suggest using The CRB Commodity Yearbook 2016 as your guide. For historical financial information, purchase The CRB Encyclopedia of Commodity and Financial Charts.