Gold News

If Not Gold, Then What?

Gold has tested patience for 2 years. But the case remains strong...
 
"WE ARE currently on a journey to the outer reaches of the monetary universe," write Ronni Stoeferle and Mark Valek in their latest, magisterial ' In Gold we Trust', says Tim Price on his ThePriceOfEverything blog, and republished at the Cobden Centre.
 
Their outstanding work is doubly valuable because, as George Orwell once wrote,
"In a time of universal deceit, telling the truth is a revolutionary act."
Orwellian dystopia; Alice-Through-The-Looking-Glass World; state-sanctioned inflationist (deflationist?) nightmare; choose your preferred simile for these dismal times. The reality bears restating: as the good folk of Incrementum rightly point out,
"...the monetary experiments currently underway will have numerous unintended consequences, the extent of which is difficult to gauge today. Gold, as the antagonist of unbacked paper currencies, remains an excellent hedge against rising price inflation and worst case scenarios."
For several years we have advocated gold as a (necessarily only partial) solution to an unprecedented, global experiment with money that can only end badly for money. The problem with money is that comparatively few people understand it, including, somewhat ironically, many who work in financial services.
 
Rather than debate the merits of gold (we think we have done these to death, and we acknowledge the patience of those clients who have stayed the course with us) we merely allude to the perennial difficulty of investing, namely the psychology of the investor. In addition to being the godfather of value investing, Ben Graham was arguably one of the first behavioural economists. He wisely suggested that investors should
"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."
Graham also observed,
"In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand."
Judgment has clearly been tested for anyone who has elected to hold gold during its recent savage sell-off. The beauty of gold, much as with a classic Ben Graham value stock, is that as it gets cheaper, it gets even more attractive. This should be self-evident, in that an ounce of gold remains an ounce of gold irrespective of its price. This puts gold (and value stocks) markedly at odds with momentum investing (which currently holds sway over most markets), where once a price uptrend in a given security breaks to the downside, it's time to head for the hills.
 
As the Incrementum research highlights, since 1971, when President Nixon untethered the Dollar from its last moorings to gold, "total credit market debt owed" in the US has risen by 35 times. GDP has risen by just 14 times. The monetary base, on the other hand, has risen by, drum roll please...some 54 times.
 
If, like Incrementum and ourselves, you view gold primarily as a monetary asset and not as an industrial commodity, it has clearly made sense to have some exposure to gold during these past four decades of monetary debauchery.
 
They say a picture paints a thousand words. Consider the following chart of total US credit market debt and ask yourself: is this sustainable?
 
To repeat, there are only three ways of trying to handle a mountain of unsustainable debt. The options are:
  1. Maintain economic growth at a sufficient rate to service the debt. We believe this is grossly unlikely.
  2. Repudiate the debt. Since we also operate within a debt-based monetary system (in which money is lent into being by banks), default broadly equates to Armageddon.
  3. Inflate the debt away.
At the risk of pointing out the obvious, which path do we consider the most likely? Which path does it suit grotesquely over-indebted governments and their client central banks to pursue?
 
But it does not suit central banks to be caught with their fingers in the inflationary cookie jar, so they now have to pretend that deflation is Public Enemy Number One. Well, deflation is certainly a problem if you have to service unserviceable debts. So it should come as no surprise if this predicament is ultimately resolved through an uncontrollable and perhaps inevitable inflationary or stagflationary mess.
 
So we have the courage of our knowledge and experience. In fact, of other people's experience, too. As the title of Robert Schuettinger and Eamonn Butler's book puts it, we have 'Forty Centuries of Wage and Price Controls' and their inevitable failure to draw upon. We know how this game ends, we just don't know precisely when.
 
We have formed a conclusion based on facts and we know our judgment is sound. For the last two years, the crowd has disagreed with us on gold. We think we are right because we think our data and reasoning are right. Not that we don't see value in other things, too: bonds of unimpeachable quality offering a positive real return; uncorrelated assets; value and 'deep value' stocks.
 
And we ask a final question: if not gold, then what? Are we deceiving ourselves – or are our central bankers in the process of deceiving everyone?
London-based director at Price Value Partners Ltd, Tim Price has over 25 years of experience in both private client and institutional investment management. He has been shortlisted for the Private Asset Managers Awards program five years running, and is a previous winner in the category of Defensive Investment Performance. Tim regularly shares his views on his blog, The Price of Everything.
 
See the full archive of Tim Price articles.

 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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