On April 3, 2012 about when gold prices were near highs I said the following and got lambasted for it: “…with all due respect, the dollar is a better currency than gold. As an investor, if you didn’t already make outsize gains on gold the past 10 years, then you won’t make outsize gains in the next 10 either because gold is done leading.” A year later I teased the gold bugs by saying that “predicting the gold collapse wasn’t hard.“
What did I see that others didn’t? While I understand what people are saying about debt and I empathize with their emotions about opportunity to achieve the American Dream being harder today – heck, I have had a hard time with that – the easy truth is that currency is a relative game. Even if the Fed and Treasury devalue the dollar, it’s only devalued relative to what other central bankers and governments are doing to their currencies. Simply put, I knew that the U.S. economy was stronger than the economies of Europe, Japan, China or the U.K. That meant that we would be devaluing less.
That’s not a ringing endorsement of the state of U.S. finances, of course. I know that the U.S. is facing huge hurdles as the Baby Boomers retire and have coined the phrase “slow growth forever” which is tied to global aging demographics and accumulated debt.
Where I am today is a little different than four years ago. Back then, I believed it would take until the early 2020s for the global economy to have a reckoning with the demographic forces beyond its control and the stupid mountains of debt that have been accumulating. I expected gold to be a good investment again in the 2020s. Today though I think the future might be a lot closer than the 2020s.
As subscribers know, this year I added my first gold positions in years to our asset allocations. It wasn’t much, just 6% of holdings to either the SPDR Gold Shares (GLD), Central Fund of Canada (CEF) or the First Eagle Gold Fund (FSENX). That’s not much, but, t has done well.
In the short-term I believe the dollar will get stronger on the volatility I expect over the summer – which I talked about yesterday. As the volatility builds and the dollar strengthens, we could see gold pullback about half way to its lows of the past year. If that happens, I will want to be a buyer of more gold for the simple reason that I think we will absolutely see more central bank actions in the next year or two – likely helicopter money and more negative interest rates as central banks continue to try everything besides letting markets work.
The first chart I showed today was of the GLD vs the PowerShares DB U.S. Dollar Bullish ETF (UUP) over the past 5 years. The dollar was clearly the better place to be than gold. Here is the chart the past year. The worm is turning.