By John Fisher
Gold is currently trading over $1,100 as I write this. I expect that gold will trade sideways in the near term, most probably between $1,060 and $1,220. However, gold’s impressive rise hasn’t prevented news media and individual investors from questioning the viability of gold.
And despite the decent performance of gold over the past 10 years, they are correct. Gold is a lousy investment. It throws off no dividends or interest.
Do you know, however, what the best performing asset class was during the past 10 years? You could probably guess it wasn’t your stock portfolio or real estate. It was gold, returning 270% over that period.
Despite its out-performance of all major asset classes, very few individuals have entered the physical gold marketplace. Experts estimate that less than 3% of investors have taken delivery of physical gold and silver within the past 3 years.
Gold is principally a store of value and typically only does well in periods of economic uncertainty or poor monetary policy. Are we experiencing economic uncertainty and poor monetary policy today? Will either be effectively resolved any time soon?
Economic research has shown that consumer psychology is affected by the amount of wealth people feel they have. If they’re broke and living pay-check to pay-check, but have tons of equity in their homes, they still feel wealthy. But even if they still have a job, but are upside down on the mortgage and have negative equity in their home, they feel poor and their spending decreases.
Since the US is a consumer spending driven society, the Federal Reserve has been trying desperately to get the consumer to start spending again. This is partially achieved by keeping interest rates low on consumer debt and mortgages.
The Federal Funds Rate is currently 0.25%, about as low as possible. The Fed isn’t sure they can keep mortgage rates below 5%. Moreover, ask yourself this, “would I give the US government billions of my dollars to buy their debt for a 0.25% annual return? There would have to be some significant enticement, or underlying consequence if I did not. That is the pickle China finds itself in.
This is how it works – the Treasury gets a loan in the form of selling bonds (“treasuries”) to individuals and foreign countries. The proceeds from the sale of those bonds (debt) is used to pay the interest on bonds they previously sold those same individuals and countries months earlier.
So, when not enough buyers step forward to buy the Treasury’s debt (bonds), and they need the money to pay the interest to those already holding the debt outstanding, what’s a person to do? Here was our government’s solution… get the Federal Reserve to print some more money and then the Fed can buy the bonds from us. We’ll call it “Quantitative Easing”, and no one will really know what that means. Not exactly a sound economic practice.
The Federal Reserve has been buying billions of dollars of Treasury bonds directly from the Treasury. The Treasury and the Fed have no choice but to engage in this game. Our debt is becoming increasingly less attractive to former buyers. Thus, we have to loan to ourselves. How long can that go on? Sounds a little like a scheme that starts with a “p” and ends with an “i”.
The government deficit spending is not only increasing but is actually accelerating. We will never be able to fully repay our debt, and are barely able to service our debt today. Quantitative easing is not a viable long-term strategy. Bernanke’s only fallback is to throw cash out of his helicopter.
Clearly, we are currently in a crisis period in terms of monetary policy. Over the long term gold prices are likely to keep going up, that is unless the government stops printing money. We all know that is not going to happen.
Liu Mingkang, chairman of the China Banking Regulatory Commission recently said, “Low U.S. interest rates and a weaker greenback have “seriously affected global asset prices, fueled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”
