Shaken Investors Flock to Gold – But the Wrong Kind

One of the most frustrating and saddening experiences in life is being accused of something you didn’t do. Such wrong accusations aren’t rooted in logic, evidence or reality, yet even proving your innocence doesn’t always erase the doubt of the accusing party. If gold had feelings, then from 2011 to 2014, the shiny metal was feeling falsely accused of losing value.

What was happening during those years was a clarification of the difference between price and value. If prices go down, people think they’re losing money. That’s just the way the more primitive areas of our brain see the world, in terms of more and less and we tend to visualize abstract concepts, like currency, with solid objects. Three bananas minus one banana means fewer bananas. Unfortunately, that solid object view of the world, hardwired by thousands of years of evolution, doesn’t always work in finance.

Gold Falls Out of Fashion

From 2011 to 2014 gold was not losing value, even though the price was changing. What was actually happening was China, Japan and the European Union were all devaluing their currencies, which made the U.S. dollar look stronger and stronger in comparison. Since commodity trades are mainly denominated in dollars, the prices of all commodities, including gold, silver, oil, steel, iron ore and platinum started to adjust downward to reflect the increased purchasing power of the dollar.

Donald Trump made reference to that very process in Thursday’s GOP debate, using tractors as an example. He pointed out that his friends were buying Komatsu tractors instead of Caterpillar because the Japanese have been steadily devaluing the yen. The GOP front-runner opened the door to a more aggressive policy dealing with the global currency race to the bottom which leaves the U.S. holding the bag, figuratively and literally. The U.S. engaging in tit for tat currency devaluation or using tariffs against China, Japan and the EU would have a dramatic upward impact on the price of commodities, particularly gold.

Stocks Out, Gold In

The one thing you can always count on with Wall Street is it just can’t help itself. Instead of steadily growing revenues and share prices with investment in the company and increasing sales, the smartest guys in the room cut the corner with endless stock buybacks, artificially inflating equity prices. A major correction was inevitable at some point. Instead of facing up to its problems and holding individuals accountable, that collective sociopathic entity we call Wall Street rediscovered gold, almost like it was a surprise.

Gold Moves Higher

While the stock market continues to take bruising waves of sell-offs, gold prices are up over three percent since the beginning of the year. The great thing about gold is there’s no way to cheat the physical metal. A high quality Gold Eagle from the U.S. Mint is an ounce of gold, period, and it will stay an ounce of gold for as long as it sits in your safe. Investing in paper gold, like a Gold ETF, reduces your gold investment to a piece of paper that doesn’t hold any more tangible value than a stock share. Paper gold is for people who want to “play” gold, like a day trader, and not really hold it. Apparently that’s how Wall Street prefers to hold gold as Gold ETFs are currently experiencing near record inflows.

The problem for those people?  There’s nowhere near enough gold in the vaults to cover all that paper.  Sam Goldwyn is famous for saying “A verbal contract isn’t worth the paper it’s written on.” If push comes to shove, and it will, paper gold is worth about as much.

There’s Still Time

With the Federal Reserve still at least publicly committed to continued interest rate hikes, those who want to convert some of those strong dollars to gold will still have a chance to accumulate the physical metal under favorable terms in the near future. But that window will slam shut fast when the Fed calls a halt to interest rate hikes or announces easing.

In addition, if the U.S. ever decides to engage China and Japan more directly over currency issues, then the opportunity will end and you’ll be able to watch gold prices escalate almost minute to minute. It’s simple prudent investing to keep a fixed percentage of your income in high quality hard assets and, for many more investors every minute, gold is that asset.

Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.

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