The economy implodes under a mountain of over-consumption funded by too much debt. Central banks coordinated with fiscal authorities, pump the global economy full of borrowed spending and printed money trying to keep economic activity from
stagnating. The economy recovers for a while, but then subsequently further weakens as the original trend continues down. Central bankers push money-printing activities into hyper-drive in feeble attempts to revive “aggregate demand'” resulting in, counter-productively, a decline in the confidence in fiat money.
Thus starts a vicious cycle of further stimulus and further erosion of monetary confidence. Gold buying goes ballistic and the whole house of cards comes crashing down with debt implosion, GDP contraction and gold at $10,000/ounce. Thus the great financial reset runs full course as debts are written down, currencies stabilize and economies begin to heal.
The above is roughly the narrative held by many smart people worried about inflation, and coincidentally, many alarmists, as well as many of those who are not fans of government authority. For quite a number of years, much of this thesis has played out. However, for the time being, and maybe for a few weeks, months or longer, this might appear to be changing.
In other words, we just may experience a period of time – could be a short or long period – where the US dollar becomes THE only safety asset (as it’s already started to do – gold is down today and the US dollar is up) and where moderate stimulus by central banks is not viewed as particularly dollar negative. This could cause enough of a change in sentiment to dramatically affect the gold market. for example, in my opinion, the majority of people holding on to gold and gold stocks at this moment are the serious inflation-thesis followers, along with gold bugs and a few nimble traders who bought on the spike down on May 16 and are still in the money. Late to the gamers, mainstream money managers and average investors are mostly out (again in my opinion).
Further Downward Pressure on Gold Could Change the Hearts of the Hardcore
If another serious spike down occurs (or worse, a break in the support levels on the gold chart – hint: we’re close), it might even
break some of these guys; and certainly the bottom pickers of May 16 would have to sell out their trades to prevent losses (likely at prices just above the low, as no one likes a “round trip”). Here’s how it might happen: a strong breakdown in gold, which might be accompanied by a peak in bonds (i.e. a bottom in yields) accompanies a drop in stock prices. This move could be sharp but also could be short. This might scare a good number more out of the gold market. And make many people believe we’ve entered a new paradigm. And this might not last just a few weeks. In order to keep a truly open mind, something might happen to make people believe in fiat paper money for a lot longer. I’m not sure what – just that many ‘inflationistas’ of the non-gold bug kind, might prefer high yielding investments in strong currencies or in their home currency as a dollar hedge instead of gold.
If Gold Goes Nowhere, How About Some Yield?
For example, a REIT in a foreign country with a solid currency, or a preferred convertible stock in a foreign currency or home currency could be an alternative money-printing choice to simply owning gold or gold equities (which suffer from all kinds of
challenges). Investors would get some currency diversification and they’d get some yield. The main issue for gold is, is that in my opinion, unless we get hyperinflation – or some strong variety of money printing – gold won’t move much. People might get sick of holding something with no yield (of course the real reason for owning gold might be lost to them, but that’s my point). In fact, I started writing this today in the morning and then the price of gold went negative strongly later in the day. And it is coming dangerously close to breaking lows in an intermediate term chart pattern which means it is close to the point of shorting by technicians, chartists and the like. On the other hand, investments with decent yield have been holding up on volatile days.
In the end, students of history will admit that debasing a currency has never worked as a stimulus measure. Debasement has occurred countless times by people looking to stretch their money and by rulers looking to inflate. Peter Bernstein’s book The Power of Gold points out many interesting cases of debasement – an excellent read by the way. However, getting to the point where the forces of debasement – central banks and government fiscal policy – actually causes widespread mistrust of paper money might take a little longer than the gold bugs would like. So if you are in that camp, it would make sense to have a plan for such a situation.
In the end, I like the idea of investments with yield blended with gold. Mining stocks have been difficult to hold as they have to contend with volatile metal prices, resource nationalism risk of governments, labor costs/strikes and commodity costs. So there’s nothing wrong with owning just gold. Gold stocks will likely give you more bang but also more volatility for your buck and for some, it’s just too much volatility and they end up selling out – which negates the purpose. As for you, you have to decide what you will do. How do you see all of this playing out? And does your investment plan reflect that? Furthermore, are you implementing that plan in a way that suits your personality and temperament? Have you even thought about that?
If not, you have work to do.