Gold: The Anti-Fiat Hedge?

Click on the chart for a larger graphic. The gold ETF, GLD, in blue and gold demand in red.

Ok, so it seems every so often the "world is coming to an end" crowd hits the street running with Gold Is God rhetoric. Paper money is dead. The world's central bankers are destroying wealth. Only gold will save you in the coming crisis. Now is one of those times the gold bugs are feeling vindicated.

There is no doubt inflation has taken its toll on the dollar. Today's dollar is worth alot less than a dollar of the last decade or the decade before that as is the case with all currencies. But, one also benefits from inflation in the form of rising asset prices such as stocks and real estate. Mortgages taken out thirty years ago benefit from inflation as well. So does all long term government debt. If I can borrow for $1 today and pay you back with equivalently 10 cents or some fraction at a point in the distant future, is that entirely bad? People and countries benefit from a strategy of mild inflation. Sustained mild inflation typically means economic growth is taking place. In other words, paper money affords everyone an opportunity. If one understands the role of inflation and the benefits of paper money, they can develop a strategy to stay abreast of it or benefit from it rather than constantly trying to overturn the system or claim conspiracy theories. Don't we already have enough to worry about?

I have generally stayed clear of gold discussions on here. I don't think I've mentioned gold as an investment at all. It's not that I am oblivious to it. There are times to consider gold as an investment just like any other asset class. Gold has a strong appeal in times of heightened risk for economic or currency induced calamities. But gold is also appealing to those who are always bloviating that economic prosperity and the associated rise of economic assets are part of some conspiracy that is bound to end tomorrow. For all I know the world might end tomorrow. But, I doubt it will be caused by central bankers.

I'll repeat myself again by saying The Fed, the EU Central Bank, the Bank of England, The Bank of Japan, The Reserve Bank of Australia or any other central bank does not have a death wish for their respective currencies or economies. They have a fairly good idea of what actions would cause the death of their currencies and economies so paranoia is generally not well directed. I'm not saying events could not unfold which are beyond typical thinking because they do and will continue to do so. Central bankers are sometimes contributors or unable to stop said events. I've said on here time and again that central bankers cannot induce economic prosperity or always save economic expansions by easing monetary policy as so many believe. If you believe this, you are completely wrong. If it were so easy, making money would only require one to "show up".

Gold is oft considered a hedge against inflation. Seemingly unbeknownst to many, gold is also considered a hedge against deflation. It's basically a hedge against risk be it real or perceived. (Most of the time perceived.) But, as gold and gold miner stocks rise many believe its a sign central bankers are printing money. When the stock market rises, those same people are calling it manipulation. What's the difference other than personal bias? The Federal Reserve and other central banks definitely aren't in money printing mode right now.

The compelling nature of the gold investment thesis has been almost completely invalid from a historical perspective. If you are an agile trader, you might be able to take advantage of gold's volatility at certain times in history. But, during those moves of higher volatility, gold has also buried many investors with wild swings downward. A long term hedge or investment? Do you want to know how well gold has been as a long term investment? Gold is valued in the same dollar that it was thirty years ago and longer. The Nasdaq is up well over 1,000% in the last few decades even after the massive crash of 2000. Gold? Well, depending on where you measure from, it's either negative in its return over that period of time or has a return of about zero.

Many argue that inflation has killed the dollar over the decades. They tell you to buy gold instead. Gold can still be bought with that same measly dollar in the same general trading band that has existed for the last thirty years. Can you buy Intel with that same measly dollar for what it was worth thirty years ago? How about Exxon? Microsoft? Johnson & Johnson? Wal-mart? Target? Citigroup? Bank of America? Thank you very much but I'd prefer to invest in the industriousness of a free society over the long term rather than gold.

Would I buy a gold ETF or gold miners at the right time? Sure, as a trade. Maybe a trade lasting years. Yet, it would take a really terrible economic calamity for me to buy gold with the intent of holding long term. Not the prospect of a calamity as has been fabled time and again but actually having one. If we ever see a true economic mess, it doesn't matter whether I own gold, dollars, yen or anything else. The pain will be well beyond any individual's perceived control and we are all going down with the ship. Why invest long term in an asset which has had a terrible record as an investment vehicle?

Curiously, as gold stretches toward $700 an ounce again, demand for gold is no where near where it was the last time it reached this level. I could interpret that statement two ways. One, that means demand could continue to rise significantly with weak hands shaken out or two, this is a very weak attempt at making a substantial new high and the smart money isn't along for the ride. It might be of interest to know every Tom, Dick and Harry is crowded into the the "long" gold trade here. So I'd say we are more likely near a top in gold than a move to $1,000 or $2,000 as some have speculated. Will we get to those levels some day? That likely depends on macro events that have yet to unfold. Unless, one believes certain asset price movements are somewhat pre ordained. I'm open to such a perspective but don't know that to be a fact. The trend is your friend and gold's trend is up but there are many nonconfirmations surrounding this move.