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Will Gold Double, or Halve?



December 22, 2011 – Comments (1)

Board: Macro Economics

Author: yttire

Gold has a historical strength in retaining value against inflation. A suit of robes in Roman times costs the same as a suit in modern times- one gold coin.

However, it suffers from lots of volatility in the medium term.

I wouldn't be surprised to see gold double in the next two years.

I wouldn't be surprised to see it halve in value either.

Both of these are reasonable outcomes, and therefore, you should invest accordingly.

How do you invest with that sort of nonsense? Well, you consider it for what it is- a hedge against extreme inflation. To the degree you need a hedge against inflation, consider gold.

You might also consider what other things might do well under extreme inflation- property, TIPS, high dividend stocks where they can pass on their input prices easily, and other asset classes outside of the USD (or your favorite currency of choice which might be inflated away).

So I would consider it among a basket of potential inflation fighters. The fed has been printing money like crazy. There is not incredible inflation at this time (it could arise unexpectedly, but the Fed can cease purchasing bonds).

So, my view is that gold is going to be subject to the volatility of anything which is not of known precise value, but known to be valuable, namely drifting up and down with the mood of the time in extreme ways.

My guess (which may be inaccurate) is that there was a flight to gold in safety both as a place of safety away from the dollar (when the massive printing was scaring inflation buyers) and a place away from European (or other possible junk).

In the middle of the crises (2008) gold really got its sparkle:

The price of gold dropped, and then started rising considerably. I think this reflect perception, or fear, of other asset classes being junk. Now gold is "topped out" which I think more reflects the fact that gold is perceived to be equally risky to USD than that the other asset classes have become popular. Basically, the USD is the new gold, so that may well be the place to be investing in safety (and to play on this fear).

These factors could change it:

- If inflation seriously starts up in the US, then I would expect the price of gold to start rising quickly.
- If gold starts dropping due to random market forces, then a lot of people who fled to safety in gold will flee to safety in the USD, causing it to drop further

Thus, both likely scenarios will lead to a rapid change in gold's price. Personally, I would shy away from making a call on this before it started to happen in a large movements. Catch the last 90%, and miss the first 10%, to avoid the 50% loss in the wrong direction.

Now if you knew hyperinflation were around the corner, then I would bet heavily in gold.

Yet, we don't have inflation. The fed has a mandate to prevent inflation. They deliberately bought bonds which would eventually come to completion to control the money supply. They didn't dump money on the market openly- the dumped it so it would "clean up" at bond termination. You know from this action they are deeply concerned about hyperinflation and inflation.

So we have a large powerful body controlling the money supply attempting to forestall inflation.

Anyone who is calling for hyperinflation should back up their belief with some likely scenarios.

Here is one- due to political realities the Fed drops the mandate of preventing inflation and mandates a high rate of inflation to pay off the debts through inflationary default. I personally would recommend this, but I doubt it would come to pass.

If this did come to pass, then suddenly gold is looking like a great investment. This could easily happen if Congress attempts to take control of the money supply, which could well happen (there have been rumblings of this off and on, and if the Eurozone collapses partially a massive recession may cause a political change that leads to such an eventuality).

So you can attempt to front run this- this is essentially what the extreme gold bugs are saying over and over- that there is going to be a massive set of inflation because they know the political future and Fed decisions of the future. This could well play out this way, but I don't have the same strong conviction of knowing the future. Therefore, I don't have the same enthusiasm for gold, but do believe in it strongly as an inflation fighter, and the need to jump on board if inflation picks up strongly.

So the moral of all of the above is:

- play gold as a market timer for the time being for large positions
- if you strongly believe in high or hyperinflation, strongly build up a diversified asset base of inflation fighters which would include gold
- otherwise consider that gold could drop sharply if the USD does not appear to be massively undermined as a currency.

1 Comments – Post Your Own

#1) On December 22, 2011 at 3:16 PM, JasperCapital (< 20) wrote:

>>Will Gold Double, or Halve?



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