Gold Bugs Aren’t All Tinfoil Hat-Wearing Zealots
Gold Bugs Aren’t All Tinfoil Hat-Wearing Zealots by Jared Dillian for NewsMax
Gold has had some reputational issues since reaching a record high in 2011. The thesis at the time was that a massive expansion of the money supply via the Federal Reserve’s quantitative easing program would spark hyper-inflation, making hard assets more attractive than financial assets. Hyper-inflation never came to pass, which helps to explain why the price of gold tumbled almost 50% over the following four years.
We still don’t have very much inflation, and yet there is renewed interest in gold with prices reaching their highest since early 2013 at about $1,440 an ounce. There are a lot of reasons to like gold. One is that gold tracks fairly closely with budget deficits. The highs of 2009-2011 roughly corresponded with the large deficits that reached 10% of GDP during the Obama administration, which included the stimulus spending during the Great Recession and a sharp depreciation in the value of the dollar.
This time there is a sense that the deficit problem is large and intractable. The Congressional Budget Office forecasts the deficit will more than double to 8.7% of GDP by 2049. Also, there is open discussion of things such as modern monetary theory, or MMT, which would be about the most gold-bullish development imaginable.
Gold is the closest thing that we have to an objective store of value. Many disagree, saying there is nothing objective to gold’s value, since it generates no cash flows. That’s not the point. The point is that there is a finite amount of gold in the earth’s crust, there is growing evidence that we have mined most of it, and aside from traveling to an asteroid, we aren’t going to produce much more. (Full disclosure: I have positions that would profit from rally in gold and the shares of gold mining companies.)