Early last week, you may have seen Harry’s latest message about gold (and silver too). He’s got some pretty strong evidence that the metals are due to take a tumble.
In fact, he said now would be a good time to drop any gold you’re still holding. “Get rid of it,” he said, and he detailed exactly why.
Since I tend to agree, and never really understood some people’s intense fascination with the yellow metal anyway, I figured it’s a good time to share my opinion too.
There will come a time to buy gold with both fists, but this isn’t that time.
Gold bulls tend to frame their arguments around three major points:
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Gold is an inflation hedge.
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Gold is a hedge against currency manipulation.
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Gold is a crisis hedge.
I actually concede the first two points. Gold is a decent store of value during times of inflation or currency devaluation. But that’s insurance we don’t need right now… a little like buying life insurance after you’ve died.
Let’s look at the numbers.
Since 2008, the Core PCE Inflation Rate – the Fed’s chosen inflation gauge, which excludes food and energy – has consistently been under the Fed’s 2% target. It’s trended higher for about a year and a half, but it’s still well below 2012 levels… let along pre-crisis levels.
Whenever I mention core inflation, I hear howls of protest. After all, by excluding food and energy, isn’t the Fed effectively cheating?
Not exactly.
If we’re going to have a Fed… and if we’re going to give them a price stability mandate… then stripping out food and energy is the only sensible way to calculate it.
Let’s pick a grocery store item at random: a gallon of milk. (Yes, I’m the one person left in America that still puts milk – actual cow milk and not soy, or almond milk, or yogurt, or whatever happens to be trendy at Whole Foods at the moment – in his cereal. It almost feels naughty… and it tastes so sinfully good.)
In any given trip to the same grocery store, I’ve paid as little as $2.00 or as much as $6.00 for a gallon, with no real trend. The price bounces around based on very short-term supply and demand conditions.
You can’t – and shouldn’t – base monetary policy on something that volatile and noisy. So the Fed is only being reasonable when it excludes it.
So, inflation is tame at the moment. But it’s still bubbling under the surface, just waiting to explode higher, right?
Again, not exactly.
In fact, I’m a lot more worried about chronic deflationary forces.
Just this week, I read a story that British farmers are looking to invest heavily in robots to replace the cheap Eastern European labor that’ll no longer be available post-Brexit.