My Theory About Gold as Diversification to the Busted “Everything Bubble”

And over the long term? It gets complicated, as they say.

Since October 1, the S&P 500 index has plunged 19.6%, to 2,351 as of Monday’s fiasco. Over the same period, the price of gold has risen 7.3% to $1,271/oz. Over this short period, gold was an effective diversification.

For the year so far, the S&P 500 index is down 12.1%, gold is down 1.6%. For the past two years, the S&P 500, despite the huge volatility, is up 4.2%, and gold, also with some volatility, is up 9.7%. Moving in the same direction over these time frames, gold has been somewhat less effective as diversification, than it has been over the past three months. But as the chart below shows, its moves were not in lockstep with the S&P 500, and thus gold has helped counter-balance the erratic gyrations of the S&P 500 with its own erratic but different gyrations. Diversification can be messy:

There are many reasons to trade or own gold. But here I focus on gold as diversification to the Everything Bubble and particularly to stocks – and how that panned out over the longer term.

Nearly all asset classes have risen in parallel for nine years since the onset of global QE, zero-interest-rate policy, and negative-interest-rate policy: Stocks, bonds, leveraged loans, commercial real estate, residential real estate, art, classic cars, emerging market bonds, emerging market stocks….  We call it the Everything Bubble. And now they’re headed down together.

Diversification is not possible among asset classes that move together. If for nine years all asset classes in your holdings rose together, no matter how good this feels, you’re not diversified.

Effective diversification means that some assets rise as others fall. But in the Everything Bubble, most asset classes rose together. And “well-diversified” investors were diversified only in their imagination, as they’re now finding out as nearly all asset classes have been falling in parallel.

Effective diversification comes with some costs, and it’s not risk free, but it provides some stability and lowers the overall risk of your holdings.

Cash always provides diversification in the sense of stability in addition to providing liquidity. But from 2009 through 2016, the return on cash – such as short-term Treasury bills, FDIC-insured CDs, or FDIC-insured high-yield savings accounts – has been near zero even as inflation ate away at its purchasing power.

But since interest rates started rising, cash generates better returns. This year, the yield on short-term Treasury bills, FDIC-insured CDs, or FDIC-insured high-yield savings accounts has beaten most other assets classes (to find those CDs and savings accounts, you need to shop around). They now yield between 2% and 3%. And when these instruments are held to maturity, there is no risk to the principal since they’re redeemed at face value.

Gold doesn’t offer a yield. And its price changes constantly. So the only return obtained from gold would be derived from an increase in price. And as long as that price moves in the opposite direction over the longer term from stock-market indices, gold provides effective diversification to stocks – even if it hurts, such as when stocks surge and gold plunges, which is what happened from late 2011 through 2016.

Over the long term, gold and the S&P 500 have moved in lockstep some of the time, and diverged much of the time. This chart goes back to 1995 (both gold in $/oz and the S&P 500 index on the same axis; click to enlarge):

On September 24, which was before the S&P 500 began to plunge, I postulated that gold provided theoretical but not very appealing diversification to stocks. I wrote:

And when asset classes have risen together like this, it becomes very difficult to achieve diversification going forward – because now they’re at risk of all going down together.

My thoughts at the time were somewhat speculative since the S&P 500 was still surging. The chart I provided at the time was the long-term chart above, but it lacked the near-20% plunge of the S&P 500 since October 1 that the current chart shows. So in this instance, over those three months since then, gold has turned out to be a very effective diversification to stocks.

But the risk with gold remains: there is no guarantee that gold can’t also plunge, right along with the S&P 500. This is a real risk, and diversification might sound good, but when push comes to shove in a sell-off, it might not work. Nevertheless, given the difficulties of finding effective diversification in the Everything Bubble, other than cash, gold has shown it could do the job over the past three months – which largely mirrors its performance as diversification during the 2000-2002 crash and most of the 2008-2009 crash.

The Junk-Bond Market Just “Puked.” I discuss it on…  THE WOLF STREET REPORT

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  138 comments for “My Theory About Gold as Diversification to the Busted “Everything Bubble”

  1. Patrick says:

    – From 2003 to 2007 Gold rose ‘with’ markets.
    – Throughout most of 2008 Gold fell ‘with’ markets.
    – Gold only turned around and starting skyrocketing ‘once’ the Fed announced QE 1 in Nov 2008.
    – As soon as the other central banks started their own QE programs, Gold tanked.
    * None of this was Gold acting as a safe haven but instead simply as a commodity that rose & fell against the Dollar Index (not against inflation).

    For what’s coming it’s paramount to know the difference between the behavior of a safe haven vs commodity. As a commodity, Gold in Dollars will rise and fall in relation to the Dollar Index; not inflation, not panic. Gold is currently rising partly because it’s oversold but mostly because traders are front-running an eventual Fed rate pause as a ‘result’ of stocks falling and not due to stocks them selves falling. Gold does well during a central bank transition into easy monetary policy. Once that transition is over, Gold deflates. The good news is that I expect the Fed to eventually pause rate hikes, lower rates, pause balance sheet unwind and finally grow their balance sheet to rescue risk assets. All of these are Dollar negative and Gold positive. What will not be Gold positive is when foreign central banks begin doing the same to an even larger degree. Once other central banks massively ramp up their QE programs again, the party will be over for Gold priced in US Dollars; no different than it was in 2011. Those who treat Gold as though it has magical properties (instead of a commodity to buy & sell at a profit) will once again watch their gains disappear.

    That said, physical Gold & Sliver can provide safe haven properties but that insurance policy doesn’t kick in until things truly hit the fan. Because the Dollar is strong and will remain a safe haven bid as other countries inflate their currencies with wild abandon, Americans are still a very long way off from precious metals skyrocketing to the stratospheric prices that stackers believe are just around the corner.

    • Your time line is off, the bull market in gold continued from the bottom in 2003 through 2008, until 2011. That is all consistent with real value versus massive reflation efforts by the worlds CBs, but something happened in 2011, Op Twist, the no rate hike rate hikes, and the speculative charge into equities. 2016 saw gold mining shares bounce after being priced to bankruptcy, and subsequently giving back those gains and more, while stocks took another leg higher. Real interest rates are still negative in the short term, and gold usually correlates to energy which is in a bear market. To me its a miracle gold is doing as well as it is.

      • Agnes says:

        The point about energy is crucial. Embedded in mined and refined gold is a huge amount of used energy which will never return. Energy is fundamental.

    • Mike says:

      Expect markets with limited factors to behave oddly in future. A news item about AI called Alphazero probably means that many areas of life with limited factors for such a quasi-AI will soon be managed by AI. Not true AI like in movies but good-enough AI like in a GPS basedprogram that gives you directions.

      Areas like investing in gold, accounting, tax avoidance, etc., Can soon be taken over by similar self-programmed AI. They will be. Sooner or later.

      It is possible that Alphazero is way ahead of the work of the huge pack of researchers in AI. I doubt it. Whether the other competition will buy the Alphazero underlying software or develop their own, limited AI has arrived. Nightmare AI is on it’s way for much later, hopefully.

      The worst thing is that it is essentially undergoing an evolution-like process in learning it’s tasks. That means that the principles that we dreamed of of our legislatively or otherwise having rules restraining AI like Isaac Asimov wrote in his I robot book and others are just that dreams. It will be as easy to control as internet porn images.

      Greed will make rich companies develop digital accountants but also digital “soldiers” controlling remotely drones or mini-tanks. Imagine Roomba sized Mini tanks coming in and wiping out all armed fighters in Islamic state in one month. It will soon be possible with no US casualties, few or no non-combat deaths and relatively minimal cost.

      It sounds great? Wait until you are the one in their crosshairs if you sue or protest against the rich crony or state. Good luck proving murder via AI.

      Maybe Steve Hawking and Elin Musk are right. Our greed and shortsighted decisions will ultimately cause AI to make us functionally extinct: with only a few wealthy remaining members of the human race after economic and noneconomic pressures like global warming reduce our populations across the coming 100 years. One black death like pandemic and we may be headed for extinction.

      Why do I mention this here? Finance and economic factors are more easily modeled in an AI’s “thought” processes because they are mathematically based. Finance data is very easy for a quasi-AI AI to access and thus analyse: sooner than you think it will be able to identify ever-present insider trading and imitate the same trades in real time!

      Secretly or possibly with some public disclosure the coming decade will see this quasi-AI take over management and analysis once legal issues arising from inevitable, initial errors are worked out. It will make it’s users rich.

  2. Nik says:

    I personally like physical gold to diversify on third party risks, with physical there is no one between you and your wealth. I do agree with you anyway since it doesn’t produce any yelds! Thanks Wolf!

    • Howard Fritz says:

      Careful Nik to purchase a quality safe to hold your physical gold. It’s strange how holding gold makes it seem so unimpressive considering how expensive it is. Granted palladium is still more expensive.

      • ram says:

        Interesting that palladium is a fairly close industrial substitute for gold and now is trading higher rather than its traditionally about 20 percent lower. This suggests that gold is undervalued even for pure industrial uses.

        Hint: The connections between the ICs and the pins, and the coating of the pins, in the the electronic device you are reading this comment on are almost certainly gold.

    • Jonathan says:

      Gold is money and therefore is not meant to have any yield. Just like $100 bills (or any other bill) does not have any yield. People say they have money in the bank – they do NOT. A bank deposit which gains interest is NOT money, although very liquid. It is an unsecured deposit in a potentially insolvent bank. Once you lend your money to the bank (what is incorrectly called a deposit), it belongs to the bank. Only if the bank feels like it and the government allows it, you can redeem some/all of your “deposit”.

      • Atu says:

        J. , a hundred dollar bill is not money, it is “money” , it is a credit on nothing and forced to be accepted, issued by the CB, necessary to pay taxes. It has a net negative yield by dilution, even if it seems to gain value by productivity gains. In fact the only positive is IF you consider that the overall schematic of fiat money somehow allows a favourable evolution to whatever is important to you, something that would be endlessly debatable.

        H.F. , what is unusual is that gold is not desperately needed, there are vaults loaded but not “used”, and yet it maintains value. Natural scarcity is one possible reason, but that is only a part of its worth, some commentators hint at other reasons. I don’t think unimpressive is completely correct, you must have been fed expectations, personally and in neutral terms (so trying to avoid any excessive sentiment) , I would call gold complete or settled or unchangeable, something like a promise that is already fulfilled. Sure others will see it differently though.

      • mike says:

        I suggest you read of the history of sea shells, quetzal feathers, cacao beans, and historic Money. Gold must still be treated as a manipulated commodity or fungible asset.

        It is not money unless you can pay for dinner with it and get change back in gold, pay the employee that parked your car with it also, etc. I agree with rest of your analysis with the caveat that your loan to bank is an equivalent value to a specific dollar some with a contract that tracks some factor to value your rights.

        The danger is in assuming that the current high demand (manipulated to keep the price low maybe) wil always continue. Have you heard about Tulips for investment purposes anymore?

    • petedivine says:

      A lot of stocks don’t dividend yields.. A lot of bond yields don’t keep pace with inflation. Real Estate has a carrying cost and is often not cash flow positive. And of course Gold won’t go to zero…unlike stocks and bonds.

    • elysianfield says:

      ” with physical there is no one between you and your wealth.”

      Ahh, Nik, I beg to differ.

      The only thing between you and your “wealth” is a 3rd party to provide liquidity…and at a cost that circumstances will define. When times are sporty, what will your friendly coin dealer or pawnbroker say?

      As a retired pawnbroker, I KNOW what will be said. Gold bugs never seem to factor this metric into their calculations. You pay a premium when you buy the stuff, and you will pay a premium, and sometimes a healthy one, to divest…especially if you are standing in a long line to do so.

      Been there, done that and I have the T-shirt….

    • Mike says:

      Amen. However, if you are very rich, good luck with the inevitable burglars. I heard they targeted the home of groups with a fondness for gold.

  3. Jos Oskam says:

    Paper assets can and regularly will go to zero. Companies fail, shares become worthless, bonds go to zero. Derivatives are even worse and may end up costing you money.

    To offset that, I like physical assets. Cash and precious metals fit the bill as long as they are in your own safe. Art, classic cars, antiques and such for people who know what they are doing.

    In the current financial climate we see paper wealth simply evaporating. Physical assets may go down but I do not see them go to zero. That is why I like them for diversification.

    Call it an insurance policy.

    • bungee says:

      Jos Oskam,
      Notice that the article never mentioned “physical” or differentiated it from paper or which form should be bought as the hedge/diversification. That is the gorilla in the room.

      • Jos Oskam says:

        Yes, that is exactly why I commented in the first place.

        • bungee says:

          I mean the difference between gold and paper-“gold”. THAT difference is not explained.

      • Chris says:

        “Why trade your anchor against the wind in the storm of centuries?” (2009) J Sinclair

        PS See what happened to the Venezuelan/Zimbabwe/Weimar share markets etc & the purchasing power of things that hurt when they land on your foot.

        We`re @ the bottom in commodities & top in USD!
        Recent high in AUD gold – whats going on ??!

    • Johnny W. says:

      Yes, Gold isn’t for “making money”: Gold is simply an Insurance Policy for a Balanced Portfolio, as are other Commodities when owned in moderation.

      Look, we all have Homeowners, Auto & maybe Life Insurance. I guess the conundrum for some Folks is the efficacy of having Commodities/Gold as a component of a Balanced Portfolio. That and the possible social stigma. There has been so much vitriol against gold by so many Gurus like the Orifice of Omaha, amongst others, that a lot of Investors are afraid of becoming associated with the Tin Foil Hat Club.

    • Argus says:

      Agreed. Also, physical gold holds its buying power over time despite short term price fluctuations. Compare this with the US dollar over the past 100 years.
      I only have about 5% of my portfolio in physical PMs (wish it was more) but it allows me to sleep better at night.

  4. HB Guy says:

    Merry Christmas, Wolf, and thanks for the great job you do of covering financial news.

    I’d respectfully disagree with your comparison of gold’s short term performance relative to equity indexes. Yes, it’s up, but it also fell by nearly 1/3 in 2008-2009 before spiking to $1900 in 2011. My point is it doesn’t always move in the opposite direction of equity markets.

    More significant have been the actions of the Plunge Protection Team, Fed proxies and other Central Banksters to suppress the price gold. Jim Richards has done much work in this area and suggests that when the global monetary system resets gold will be valued multiples higher than what it is today. He suggests $10k or more per ounce within 3-5 years.

    Finally, gold is no one else’s liability and has retained its relative value over centuries, if not millennia. It’s a store of value, and for that reason I question short term comparisons to other asset classes.

    • RD Blakeslee says:

      Gold as a store of value may be one of the the reasons Wolf had in mind when he wrote:

      “There are many reasons for … owning gold.”

      “But here I focus on gold as diversification to the Everything Bubble and particularly to stocks”

      I, for one, hope Wolf writes about those other reasons, but I recognize his more limited coverage in this article.

    • Wolf Richter says:

      HB Guy,

      “My point is it doesn’t always move in the opposite direction of equity markets.”

      Yes. See the paragraph above the long-term chart, see the long-term chart, and see my last paragraph.

    • Setarcos says:

      Assuming $10K/ounce occurs, or some similar significant rise, does it ever become a sell? If not, it’s value is not really from an investment perspective. If so, what would the holder trade his gold for? Seems like any gold transactions at that point would be under the table. So if I want to buy something with my gold at that point, my options would be very limited.

      • nearlynapping says:

        For me, gold will be a sell if I need to sell it, or when it is in a bubble. I hope I will know it is in a bubble by looking at the value of what I can exchange it for. This has much more to do with the specific goods and property I can exchange it for than the face value of any particular currency I can exchange it for. As for gold transactions being “under the table”, I am not sure what that means. Gold will always bid for dollars. So gold will buy whatever dollars or any other currency will buy.

      • Argus says:

        When would you sell? Well in Venezuela, one oz of gold will buy you a whole lot of chickens to help you survive.
        In Zimbabwe, no-one would sell the necessities of life, e.g. food, for the worthless currency, only for a tiny bit of gold.
        Think hyperinflation couldn’t occur in the developed world? You have more faith than I in the central banks.

        • daniel says:

          Venezuela is a much different story now because you could not sell gold there. Nobody could afford to buy it and if they could buy it would be in worthless bolivars that devalue a huge percentage everyday.

          I have a good friend who lives in Caracas. 2 years ago he bought enough food for him and his father for 6 months for only 1/4 ounce of gold. The nearby grocery store even delivered all the rice, frozen chicken, pasta, sugar to his condo.

          A few days ago i talked with him and he said there is no possible way to even sell gold because nobody has any US dollars or enough goods to trade. Only the high ranking military or government officials would have enough US dollars to trade for gold and more than likely they would just confiscate your gold and think of some reason to put you in jail.
          But gold would be great to leave the country with because it is easy to hide or carry.

      • HB Guy says:

        Gold is a store of value, not an investment. I assume one would sell it only to raise funds for a necessary purpose or emergency.

  5. Mike says:

    Gold is doing its job well having broken through its 200 dma. I think the price has the potential to go much higher as I believe the big money is sitting on the sidelines believing the FED is going to reverse course on QT and higher interest rates – they won’t in my view. The best play will be the gold and silver miners which are very undervalued right now. I made a killing on them after Yellen raised the interest rate back in December 2015, hitting several home runs, and I believe this will happen again when investors realise the FED isn’t going to reverse course and other central banks are going QT too.

    • Nat says:

      Doesn’t Gold usually track in reverse to rate hikes (generally going up on rate-cuts and down on rate hikes)? Presumably its the same for QT, i.e. QT should deflate asset values including gold, while QE should inflate asset values including gold. From what I am seeing in gold value, the value of gold went down by Dec 2015 rate hike, comes way up when the Fed stops hiking rates for for most of 2016, and then drops down again in December 2016 when the next rate-hike occurs.

      • Gold doesn’t like higher interest rates and bonds are sitting on a powder keg because stock market sellers have been diversifying into bonds at a percent gain equal to that of gold, and on a nominal basis that disparity is much more. The dollar could lose value, but Fx is a fools game, drop relative to what? In a globally synchronized deflation?

        • Nat says:

          I meant loose value relative to the dollar. Rate hikes generally = stronger dollar which usually increases its purchasing power relative to gold.

          I am not sure why you posted the rest of your word salad though, I am having trouble understanding its relevance to anything I was saying.

      • Mike says:

        In a normal functioning market gold should go down when rate hikes occur but we’re far from normal functioning markets. Gold went up after the December 2015 rate hike and peaked in June 2016 as everyone knew the markets were a complete fraud (and still are). With insane levels of debt everywhere the rate hike (the first in nine years) made everyone very nervous so they jumped into gold. When the collapse didn’t happen rate hikes became less of a concern and gold went down again. Now however people are very nervous again and many are buying some gold just in case. Unless the FED reverses course (and more importantly restores confidence in doing so) I think gold is going to fly. QT is deflationary but historically gold has gone up during deflationary periods. I’m far more interested in the PM miners rather than the physical, although I do hold some physical.

  6. OutLookingIn says:

    Gold depends upon NOTHING for its value.
    Besides, it will NEVER go to zero and should ALWAYS form the base of any portfolio, held in physical form under personal control.
    Whereas paper assets have a penchant to become valueless and often do, reverting back to their zero base line.

    The only other sector (imo) that offers diversification at this juncture is food and the enterprises that surround its production.
    In particular commodities; grain, rice, corn, soy beans, etc.
    On the end producer for consumer consumption, look for solid entities with a long track record of effective management eg: Hormel Foods (HRL) makers of SPAM and many other products.
    The farm support sector also offers opportunities eg: Fertilizers, seed producers, etc.

    Disclaimer: This should not be taken as investment advise. You should always do your own due diligence. I hold a position of HRL.

    • Nick says:

      Gold depends on value for the same thing that everything else in the world, valuable or valueless, depends upon — the interest of other parties in purchasing it. There is no such thing as ‘inherent’ value, it is created out of aggregate demand.

      • Escierto says:

        That’s true but gold has 5000 years of human history behind it. It was a store of value back then and it’s a store of value now. Gold IS money – everything else is just a wannabe. When the US government debt explodes to 30 or 40 trillion in a few short years, the US dollar will look like Venezuelan Bolivars look today. Toilet paper.

  7. Asherz says:

    Central Banks have created the biggest bubbles in history in reaction to the Great Recession. Tens of trillions of new currency were created out of air. But this was made possible by creating additional DEBT. We now have Debt/GDP ratios that are unsustainable.
    As the crash progresses the major Central Banks will not permit defaults in major sovereign debt. The only way debt can be repaid is by restructuring or depreciating fiat currency. We have seen this in Germany almost a century ago and other nations since. The only real protection of ones wealth is in the precious metals. From Rome at the end of its empire on and all currencies since, this scenario has always been repeated.The price of other physical collectibles will plunge with all the other paper assets. Paper precious metals will be shown to be a chimera.
    The only major risk is that the governments will do what FDR did in the 1930s. I will leave it to the reader how to take care of that possibility.

    • Johnny W. says:

      Large Multinational Equities also held up in the Weimar Era.

    • Lisa Murphy says:

      Asherz —

      “The only way debt can be repaid is by restructuring or depreciating fiat currency.”

      “Restructuring the currency”? not sure what you’re talking about there. As to depreciating the currency, I assume you’re talking about hyperinflation, but that would be the absolute last thing the Central Banks would want to bring about. The Fed has never done so in the past.

      “As the crash progresses the major Central Banks will not permit defaults in major sovereign debt.”

      Oh? Why are you so sure? And also, remember, defaulting or not defaulting on the debt is in the hands of the Treasury Dept. not the Fed. As to the Federal government not “permitting” default, they will have to permit it since it’s inevitable. The debt is too massive not to default on.

      • Javert Chip says:

        Lisa Murphy

        “…The debt is too massive not to default on….”

        I was born in 1946 (I’ll do the math – I’m now 72); $1 of 1946 purchasing power now requires $13.50 of 2018 dollars.

        …that’s the integral of inflation from 1946 to 2018.

    • Panamabob says:

      “The only major risk is that the governments will do what FDR did in the 1930s. I will leave it to the reader how to take care of that possibility.”
      I have a solution for the FDR risk, learn how to test karat value by buying an acid test kit and circulate among gold buyers, they will be glad to sell marked gold near or less than spot prices. Their ultimate buyer only pays 92-93% of melt unless they send for fire assay a few points higher,…then they have to trust their refiner.
      The buyers of gold teeth, broken jewelry, or unwanted used gold will always exist leaving only the risk that which was experienced in Nazi Germany.

  8. HR01 says:

    Gold remains mired in a secular bear market, now over 7 years long. Unless it manages to retake and hold $1434, there’s nothing to discuss. Even with this $100 move up since the summer lows, MACD remains in negative territory on the $GOLD chart. Weak.

    QE postponed asset deflation (did not eradicate it) and will now worsen the magnitude of the coming deflationary collapse as debt levels are significantly higher than ten years ago. When deflation really hits, gold and the other PM’s will also collapse.

    Currencies will collapse with $USD being the last man standing and then it too gives up the ghost. This will be the time to purchase gold and other PM’s.

    • Sherman says:

      You better buy gold BEFORE the dollar collapse ….. like RIGHT NOW>

    • Mike Are says:

      I seriously doubt that the US or other governments are going to “allow” a debt driven deflationary collapse. They will do what Bernanke did and push another, larger round of QE. This one will buy into every asset class ….stocks, corporate debt, mortgage debt, and increased shorting of gold/silver futures. Bernanke said as much during the last QE.

      A full blown deflationary collapse can be delayed with more QE. That is what they will do. No one in power and in their right mind would do otherwise.

      All that said, the amout of QE needed may be from signficant to staggering and that is what has the potential for eroding trust in the dollar. Now when that happens, you will see a very large inflationary event as dollars go searching for real value/hard assets and out of things like treasuries. One of the real value items will also include gold and silver. The demand, like ater 2008/09 will be so strong that it will likely not be able to be suppressed by governments intending to do so.

      Of course, some governments will be fighting the suppression of gold prices; namely Russia and her allies. They will be in the catbird seat with no government debt, a working economy and lots of gold relative to their GDP.

      This is what I think will be the most likely scenario to occur.

      • Panamabob says:

        Being almost 70 and a buyer and holder of PM’s since 1974 I witnessed this rise in PM’s against the decline of the dollar due to the Bretton Woods default, resulting in a rebellion from the then competition of the currencies primarily from Japan and Europe.
        The reversal was driven by the policies of the FED raising the Prime Rate ultimately to 21 1/5%, ugly for Americans. For us in the USA we suffered great inflation and record high interest rates that prevented or handicapped sales locally and bankrupted many businesses.
        The Gold Lining…it increased the value of the Dollar due to huge yields in Treasuries drawing in investment from those other strong Nations, and we were cured.
        If I live long enough, I might see a repeat and a rinse.

    • RD Blakeslee says:

      “Currencies will collapse with $USD being the last man standing and then it too gives up the ghost. This will be the time to purchase gold and other PM’s.”

      That will be too late, IMO.

      If the fiat currency has collapsed, who will accept it as payment for gold?

  9. medialAxis says:

    Personally, I’m not keen on gold, or other PMs. Besides assaying it (I assume those that buy it do their own assaying?) I don’t fancy the chore of looking after and storing it, not that I’d have much to look after. I’ll be sticking with the likes of bitcoin. Yes, its price has fallen of late, but that’s good, IMO, as it was overpriced. I’ll likely stick with my monetary wealth split 50:50 between fiat and bitcoin (it started as a 95:5 split back in 2014).

    • medialAxis says:

      Oh, forgot to say, I’ll be avoiding BlockChain. My 2019 prediction is it’ll turn out to be a massive disappointment for all but a very few, if any[1]. Most will end up with a very expensive and slow data base, which they’ll likely keep very quiet about.

      [1] Public permissionless blockchains will have the greatest chance of success, it’s the permissioned ones that’ll fail (and be swept under the carpet).

  10. Nicko2 says:

    The only true wealth from gold is owning a goldmine. Buying gold to store in a vault somewhere makes little rational sense. Much better to invest in income producing assets like property, stocks, businesses, people….or even cash.

    • RagnarD says:

      Do you realize that we are at the end of the everything bubble? What incoming producing assets do you reccomed one purchase today? Please point us to where you see today’s great income producing bargains.

      I see gold as a great value. Why?
      Gold hit a high of $800/ oz in 1980. It is now at $1200, just 50% higher after the most epic money printing binge the world has ever seen.

      Do you not see that as a great value?

      Btw a business or mine that you own can always be taxed or expropriated by the authorities.

      It’s not so easy for them track individual gold hoards.

      • Bill says:

        Yes it’s called an “everything bubble” because financial assets as a whole are at bubble level valuations. Income is historically low compared to price and price high compared to income. Physical commodities in contrast are not in a bubble, which is why their diversification potential is as important now as ever.

      • elysianfield says:

        ” What incoming producing assets do you recommend one purchase today?”

        I purchased machine tools…Otherwise known as “the means of production”….

  11. Kent says:

    I’m not an “end of the world is nigh” type of guy so I don’t see a lot of upside for gold. In 2008 lots of folks saw a major financial event in the offing and thought gold was an appropriate hedge. I see a minor recession in the offing and now we know the true power of the Fed to control any financial meltdowns. Gold should bounce around in the short term as any bump in the economy will scare the bejeezus out of some goldbugs. But it will drop as soon as everyone realizes they didn’t lose their jobs.

    • HowNow says:

      The only thing gold correlates with is inflation.

    • MD says:

      You see a ‘minor recession’; others see a world saturated with debt throughout all levels of society from the individual to the nation state. They see corporations keeping stockmarket indexes levitated using cheap credit to buy their own stock. Fantasy valuations.

      Put succinctly – they see a world of illusory prosperity, predicated not on real wealth, but on the temporary wealth-like effect provided by debt. And they don’t think it can go on.

      That’s why they buy PMs.

  12. SquarePeg says:

    I just want to point out that when gold crashed with the stock market in 2007-2008 it was on a big run up and along with gold miners was already overbought.
    This is not so today. I hate to say it but it is different this time with gold than it was then.
    In a stock market crash with many investors on margin they will sell anything that’s catching a bid to meet margin calls and quality gets sold to meet the shortage of cash. This formed the v-shaped recovery for gold in 2008 as investors quickly rushed back to the safety of gold.
    There is no telling what will happen next but looking back at the last crash is not useful today.

  13. Pelican says:

    Wolf, stagflation is being mentioned these days since the recent plunge. If that comes to pass, what would it mean for gold? Thanks in advance for any thoughts on this.

  14. Tinky says:

    With due respect to Wolf, and my usual qualification (i.e. his general knowledge of economics far exceeds mine), I believe that the value of using the period since the last crisis as a context within which to understand gold is dubious, at best.

    Not only do we find markets that were wildly inflated through interest rate suppression and money printing on a scale never seen before, but there has also been manipulation of the price of gold through naked shorting, and arguably illegal use of leverage in futures markets.

    In other words, both sides of the equation have been badly distorted by extraordinary forms of fraud.

    My view is that gold should by judged primarily not as an investment, but as a form of insurance, or store of value, with its performance during crises being paramount.

    Now, with respect to the world today, and for the sake of simplicity, I would argue that one of the following three, basic dynamics are highly likely to unfold over the coming years.

    1) the “everything bubble” will implode violently, leading to rapid asset deflation (and chaos, etc.), in spite of efforts by politicians and central bankers to stop or effectively mitigate the fall

    2) politicians and central bankers will manage to mitigate the damage of bursting bubbles, mainly by slowing the inevitable deflation through policy acrobatics, including a reversal by the Fed, further rate cuts and QE, etc.

    3) major war(s) break out, leading to rapid asset deflation (and chaos, etc.)

    Note that I did not include any relatively rosy scenarios, such as a brief recession followed by a resumption of bull markets, etc. This is not because I am a pessimist, but rather a realist, and I simply do not see any possibility of a “soft” landing at this late stage of the greatest debt bubble in history.

    So, with respect to gold, I am inclined to think about how it would likely perform under each of the three scenarios outlined above.

    I won’t review the history of the metal during crises throughout history, as readers can research that to their hearts’ content. Suffice to say, though, that it has been an absolutely extraordinary store of value over several thousand years of economic history, and I have yet to hear a compelling argument as to why it might be different the next time around.

    As others frequently point out, gold is not immune to the pressures of deflation during crises, but submission to downward pressure is usually short-lived, as it was in 2008/9, and I wouldn’t be inclined to try to time a sharp reversal.

    My view is that gold is likely to outperform in the coming years irrespective of which of the three scenarios were to unfold. Under the first and third, I would expect it to quickly shoot much higher in value due in part to a predictable flight to safety of large amounts of capital, coupled with a powerful, newfound, and widespread aversion to paper/digital assets as their values rapidly disintegrate.

    I also believe that gold would outperform under the second scenario, as a sharp reversal of CB policy would cause the proverbial curtain to rise, exposing these ‘wizards’ for what they really are, and further degrade the currency.

    I remain open to counter-arguments, but have yet to hear one that has caused me to seriously rethink my ‘overweight’ position in PMs.

    • SquarePeg says:

      Tinky… Your opinion is very well expressed and I agree with everything you said with one relatively minor difference which does not change the fact that we both have a good understanding of what gold is, what it does and what it says.
      In your third paragraph it says “…both sides of the equation have been badly distorted by EXTRAORDINARY forms of fraud.”
      In my view the fraudulent and illegal manipulation of assets you speak of is UBIQUITOUS. Gold in this respect is no different than interest rates, Libor, oil and any number of other REAL things that are priced in fiat currencies and traded on paper. Gold is unique among most assetts with no counter party risk in that it is relatively easy to hide and store, vs wheat and oil for example.
      Gold is not easy to travel with however, especially if you are crossing national borders. Diamonds anyone?

      • RD Blakeslee says:

        Diamonds are not as fungible as gold.

        An ounce of gold does not differ from any other ounce of gold, but diamonds are appraised individually, according to their unique physical characteristics,

        Their comparative valuations vary widely.

      • jpb says:

        At the present time, it is perfectly legal to carry gold coins or bars into or out of the USA. The only requirement is one must accompany the gold with a completed FinCEN Form 105.

      • nearlynapping says:

        Yes history tells us that gold is manipulated like many other assets. But one big difference is that governments have manipulated gold to a degree only exceeded by their manipulation of interest rates and national currencies. And when governments manipulate gold it is always in one direction, with one exception, which is when gold was confiscated in 1933. But that was done to devalue the dollar and help manage the debt. This time will not be exactly the same but since the debt is even bigger now — so will be the resulting currency debasement. I personally think the probability is high that gold will substantially outperform most asset classes over the next 5 years.

        • JZ says:

          Gold ca NOT be manipulated. That’s why gold is gold. Nobody can do anything to gold, that’s why people trust gold. What has been manipulated is the $.
          60 OZ is one year in Yale university. True in 1950, true in today.
          1 OZ gets you a nice suit or 1 month of cleaning Lady’s service. True in 1400, true today.
          I do NOT know where these theories of gold come from. I look at 2000years of human history, and I only trust the stuff that nobody can do anything about. That is, the sun, the universe, and gold.

        • Tyson Bryan says:

          Gold connects historically to the age of horse transport & wooden ships, running several thousand years. Steel ships and railways didn’t hurt it much, in fact made for safer transport. The advent of mineral oil fuel & the telegraph circa 1850 changed golds complexion a bit; especially the telegraph. Cars & aircraft – anything that lends velocity to its motion, may enhance its human valuation. Gold is the slow & stable standard of liquidity (see Aesop’s Fables).

  15. Iamafan says:

    I hope this blog doesn’t become just another gold pusher like the other “acceptable” ones out there. It’s too valuable. I’ve had friends and family who lost a lot in gold including my 90 year old dad. So maybe I’m allergic to it. To each their own diversifier whatever that may be.

    • Tinky says:

      That’s an odd comment. Wolf is certainly not remotely a “pusher” of gold in any sense. In fact, he is arguably more of a skeptic.

      If you are referring to those who contribute comments, I see as many or more on these threads who argue skeptically than those, like myself, who make a case for ownership.

      Finally, while I am sorry to hear about the experiences of your friends and family, such anecdotal stories are only relevant in that it sounds as though they were “investing” in, rather than holding gold as a form of insurance, and the distinction is crucial.

    • nearlynapping says:

      I have friends who lost money in housing and stocks in 2008. That does not change my view that there are times that I want to own houses and stocks.

  16. Asherz says:

    Delighted to see the gold skepticism on this blog.
    Stocks were a great investment for the last decade until October. Does that make them a great investment for the next decade?
    Gold has been a poor investment for the last seven years. Does that make it a poor investment for the next seven years?
    The Presidents Working Committee on Financial Markets better known as the Plunge Protection Team is meeting today. These are the same people who in the age of asset inflation have done their job in keeping the historical poster child for asset inflation suppressed. You can be sure that gold suppression is on the agenda today.
    Keep doubting.

    • MD says:

      Once a lot of people want – need -something its price can’t be suppressed unless legislation makes it unusable [illegal] or it is confiscated.

      Of either of those two scenarios arises then the S really has HTF and it’s Mad Max time…

      • elysianfield says:

        “Once a lot of people want – need -something its price can’t be suppressed unless legislation makes it unusable [illegal] or it is confiscated.”

        Yeah, guns used to be a liquid commodity and relatively valuable…what say we now?

  17. Nat says:

    “Gold doesn’t offer a yield. And its price changes constantly.”

    To try and counteract the former and make use of the later, I hold a little bit of gold through various ETFs (either on gold proper or the miners thereof), and sell OTM covered calls. If one wants a little better return and to convert more of that volatility into money one can also sell deep OTM puts. Regularly collecting the premiums from the calls (and possibly puts) helps create a surrogate “yield” from ones gold holdings that converts some of its volatility into profit.

    Obviously nothing is risk-free. If gold suddenly goes up like 2x in value someone will exorcise my calls, and based on their strike price I’ll only make like 20% over my original purchase value instead of 2x. On the puts, if gold drops to like 1/3rd its price suddenly I will find myself forced to buy gold. Understandably this may not appeal to others, but personally this works out well for me. My gold effectively turns a regular yield, and it effectively auto-cashes itself out on big upswings (a good time to cash-out), and am forced to auto-buy on major downswings. Suddenly my small gold diversification is forced to work for me instead of just sitting there being the (unduly worshiped) shiny yellow rock that it is.

    If you have access to the connections, loaning out your gold (either directly or indirectly through ETFs and the like) as a “barrow” for short sellers and the like is also a good way to squeeze a yield out of your gold. The BIS does that, and while it probably doesn’t fetch anywhere near as much money as their other banking operations, they seem pretty happy with the returns it fetches them.

    In short, there are ways to squeeze some yield out of gold, but yes its not risk-free and gold has to be “forcibly put to work” unlike say bonds which are productive with yields automatically.

    • RagnarD says:

      If I had “connections”with Goldman Sachs etal. and chose to loan them my gold to earn a yield, what are the odds I will win any ensuing legal battles over physical possession/ownership?

      • Nat says:

        If you have a proper contract I would have trouble imagining Goldman Sachs just runs off with your gold and expects to pay their way through the legal case. Goldman Sachs may be criminals, but their criminality usually relies on something with far more legal standing on their side then directly violating a signed contract thus allowing them to commit obvious theft.

        Surely they might do underhanded things with your gold, but that would something more like dumping it en-mass into the open market while shorting to force prices down and then buy back in slowly but surely in small odd lots to recover it all at a net discount before returning it to you. Or maybe create some complex financial instruments initially based on gold holdings (including that which they have borrowed from you), and find clever ways to actually drain out all the gold backing from these instruments leaving valueless garbage behind, while also taking out credit-default swaps on these instruments that they create and sell to “muppets.”

        In short, Goldman Sachs may be filthy criminals, but they aren’t simple thieves you make them out to be. I would like you to show me any evidence that any major firm has directly violated a gold loan contract without facing sever financial penalties.

        • RagnarD says:

          Agreed, they probably wouldn’t do something as straight up thievish as simply not returning gold. But if there is a loop hole that they can exploit, they will “relentlessly jam their blood funnel into anything that smells like money”. And you / I will be out lawyer-ed in our battle against the squid.

          And, BTW, you sound kind of sanctimonious in \ essentially arguing that, “they might poison you, but they’d never stab you in the back”.

      • HMG says:


        Zero !

    • Mike says:

      As to precious metals ETFs, contracts for delivery of such, and mining, even non-AI computer programs with OCR and Deep blue level text analysis (or a smart manager) will result in investors losing. They need only use bankruptcy and separate ETF or delivery or mining companies.

      Whole things are going well, they take in profits and distribute them to insiders by various mechanisms. If things go badly, bankruptcy and corporate limited liability leave investors owning little. Good luck if you invest iin gold and such ETFs. You will need it.

  18. Bellinghouse says:

    The Talmud even spoke to diversification back in 200 BC: “Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.”

    Many claim the “in reserve” part is meant to be gold. Some just hide paper cash in walls, tho.

  19. Thomas Molitor says:

    Asset class diversification: Why not have 5% to 10% in physical gold not gold stocks? For many other reasons than just price appreciation.

    One thing to understand is younger generations do not see gold as money as do the aging generation. The older generations remember being taught in school about the gold standard. The younger generation does not even bother with paper money and pays with their cell phones. This is raising the question of whether gold will remain as a safe-haven instrument in the future if the younger generation does not even consider gold suitable for anything other than a trinket.

    • RD Blakeslee says:

      More comprehensive question: What does the millennial generation think about ANY real store of wealth? Land? Trees (timber)? Will the attitude “Max my credit card to buy electronic gadgets” be a permanent ethos?

      I personally doubt it. Hard times reimpose traditional values and constraints which have served mankind well for millennia, I think.

    • Rowen says:

      I don’t know a single millenial that owns physical gold. Even the most bearish, zombie apocalypse millenial would rather own 50 guns. That way, he and his friends will just steal yours.

      • nearlynapping says:

        Every person that I personally know who owns gold also own guns. Many of them are former military as well.

      • gitrdone says:

        millenials are afraid of guns unless theyre hoodrats or the guns are virtual, but as an Xer I’d rather have a gun or six than gold, although both is best ;)

  20. Gold provides diversification and so do bonds. Should you buy gold here and stocks regain their upward momentum you should assume that gold will lose value. Should you buy GLD you should accept the risk that under stress the ETF can blow up. (see VIX) Physical is less difficult than one might imagine (they have home equity lines, portfolio lines, in the next iteration you can borrow against your physical PMs). To that end countries with gold in the ground can count those reserves, just like countries count oil reserves, without mining them. There are several “scenarios” for rapid gold appreciation, including Jim Rickards idea that government will back the currency with gold, while simultaneously placing a bid under gold of $5000. The best reason to have gold is that the standard portfolio allocation is woefully small, usually 5%, if the model gets raised to say 20% that would do a lot for the gold price. Problems in the global economy should reach out for many years, and in that case, no V shaped recovery, gold will enter a bull market. With the global monetary base contracting, the only question is, why is gold only up a small amount, mostly based on the fear trade?

  21. PRice says:

    Has anyone disproved Harry Browne’s allocation recommendation from 45+ years ago? His Permanent Portfolio was:
    25% stocks
    25% bonds
    25% cash
    25% gold
    Each would benefit in a different economic environment. Annual rebalancing would be necessary for adequate diversification.

  22. RD Blakeslee says:

    “… the only question is, why is gold only up a small amount …”

  23. Setarcos says:

    I don’t really like gold. This year I have been loaning money to Uncle Sam – I don’t really like that idea either. Owning gold is a bouble barrel middle finger to those who got us in this mess – an idea that has some appeal.

  24. Bobber says:

    I own 5% gold because it’s value is cloudy enough that it is a “story” in waiting, just like Bitcoin, Netflix, etc.. If gold doesn’t sky rocket, it will likely maintain some value not too far from its current value. Potential upside outweighs the downside, which is something you don’t commonly see in this everything bubble.

    Gold doesn’t produce a current return and is somewhat speculative, so you have to limit your allocation it. It has potential for 50% loss in value.

    • Lisa Murphy says:

      I have about 20% of my savings in gold (got it in 2008 during the crash) but I think that’s too much. I love gold and wish it was legal tender again – but this is my main problem with it. They don’t take it at the store! The federal government is not going to permit it to be legal tender again and the only way that will change is if the government collapses. But in that scenario, who’s going to want gold? People will be looking for food, water and basic necessities and gold may actually be worth about zero.

      • Escierto says:

        As always gold and silver will be a means of exchange for food and water and other necessities. Just as it was in ancient times. Louisiana, Utah and Texas have passed laws recognizing gold and silver as legal tender. Other states will follow.

      • JungleJim says:

        “But in that scenario, who’s going to want gold? People will be looking for food, water and basic necessities and gold may actually be worth about zero.”

        You might be surprised. In the ruins of Berlin in 1945 you could find all sorts of things for sale including food. The preferred payments were American dollars, American cigarettes, Scotch whiskey, penicillin and oh yeah gold. Think that couldn’t happen again ? Think Venezuela.

  25. f says:

    Gold is not a trading instrument particularly when paper gold markets are that manipulated by the governments and their owners. It’s not even a secret as gold is the currency of currencies in the world of giants (mega rich, multinationals , megabanks and governments).
    As of Jan 2019 physical gold will be a Basel asset 3, meaning the most solid asset a bank/financial institution/country can hold.
    Unless you have studied it a bit , gold is difficult to understand but suffice to say, just look at its performance when a currency goes under (argentina, venzuela, brazil, iran, turkey, russia etc…).
    The USD has a natural tendency up when things go wrong simply because it is currently the reserve currency of the world, not because it is american.
    These things can change very rapidly, that’s why one should own some physical gold to act as their own central banks.
    Not to mention that it can be hidden and transferred easily if the shit hits the fan. When that happens banks are usually closed or accounts frozen.
    No need for paranoia. But it’s a bit like living in Manhattan without a reserve of water or food. Not wise.
    And personally I love to touch it. Seriously.

    • RagnarD says:

      “And personally I love to touch it.”

      Agreed. It’s pretty cool stuff.
      Shifting a safety deposit box chock full of silver is pretty fun too.

  26. walter map says:

    I do not see even a marginally compelling reason to be impressed with any precious metal as a financial instrument. Gold bugs are fooling themselves, but then, people seem to be able to fool themselves about practically anything, so why not.

    Financial valuations are far less interesting to me than the normative valuations on which they are based anyway. I’m sure it’s heresy around here to say there’s much more to existence than money money money, but that’s fine with me.

    Gold is worth something to other people and is therefore worth that much to me, I suppose, given the occasional opportunity for some exchange. It’s shiny, conductive, and corrosion resistant, but so is other stuff, so it’s intrinsic value is a really a very minor consideration. Admittedly it does look nice on the attache from Swaine Adeney I got for Christmas, but brass would have done as well, not that really I have any use for such a thing, compared to the Delft ware tea set which is something I can actually use.

    • Lisa Murphy says:

      walter map–

      “I’m sure it’s heresy around here to say there’s much more to existence than money money money, but that’s fine with me.”

      That’s weird. I’ve never gotten that sort of impression from a single person here.

      “Gold….It’s shiny, conductive, and corrosion resistant, but so is other stuff, so it’s intrinsic value is a really a very minor consideration.”

      Other stuff? Gold has rare qualities that is like no ‘other stuff’ whatever it is that you mean by ‘stuff’. If you mean metals, gold is in a class by itself.

      “…intrinsic value is a really a very minor consideration.”

      It should be your only consideration.

      • walter map says:

        Practically anything, I said.

        Not that I would presume to discern your tastes, but may I recommend the Mini Pullman?

        Valuation is a tricky thing, is it not? One mans trash is another mans treasure, for example. That which some people may hold in high regard – family, friends, human life – may be discounted to varying degrees or even completely by others. This is particularly so, in certain circles, where a financial valuation may be difficult to assign, if at all. And then there is the topic of economic externalities, about which books have been written, without resolution or consensus.

        What makes a stock market index fall 650 points one session and rise 1080 the next? Roller coasters seem to be in style these days. I have a theory, but it offends some people.

        It is sometimes said that the value of anything is what somebody else may be willing to pay for it, or exchange for it. But even this cannot always be true. Van Gogh paintings, for example, would hardly be considered priceless, or even valuable, if his brother’s widow had not made a career out of marketing them.

        Do you enjoy discussing theories of valuation?

        • Atu says:

          “Gold is worth something to other people and is therefore worth that much to me…”

          You are following a hypothetical valuation of gold by another, which in effect is viewing gold as intermediary to transaction between your want and their ability to later transact for another want . They call that money .

          “Financial instrument” – finance literally means payment or settlement. The speculation which you are meditating will take you nowhere without some form of recognisable exchange.

          So it is no wonder you are confused.

        • Prez left the country for the day, rumor is if he had left office the rally would have been even more impressive

  27. rawtrader says:

    It is very important to note that the production cost of gold is currently hovering around $1100 – $1200 which is just just below what it is trading at. This minimizes the chance that gold will fall much lower, and if it does it will wipe out several many miners over time, which would in turn lead to an even higher price. The production cost should continue to increase over time because gold is so scarce and requires higher costs for exploration, oil, energy, etc to find and extract more.

    In my humble opinion, the modern economy/markets and debt-based fiat currency is just an enormous man-made experiment that is bound to go bust at some point. There are no universal laws governing it, just greed and ignorance. Holding on to some gold as insurance is a very smart idea if you have some extra cash laying around. Also, central banks (especially China/Russia) continue to buy it, which shows that it is truly more than just a commodity or pet rock.

    “Gold is money, everything else is credit” A 100 year experiment does not change 5,000 years of history.

  28. Saltcreep says:

    I see it as an insurance against some imaginable outcomes, and also a form of freedom from what I consider increasingly unfair and exploitative financial and monetary systems.

    If I were to sit down and do the math today, I’d guess I’m probably over 30% in physical gold by now. I hope never to sell a single ounce of the stuff, and I don’t care about its price, so calling it an investment doesn’t sit right with me.

    I’d be happy as a bunny in a carrot patch if things go on over the coming decades as they have in recent decades, and my gold just gathers dust until I die, and serves no other purpose than letting me sleep a bit easier. But I’m pretty sure they won’t, as I think the age of resource based growth ended 40 years ago with peak conventional oil, and was replaced by the age of debt based growth, and I fear we’re now approaching a time of serious reckoning in respect of our exponentially increasing debts and shrinking equity.

  29. Bam_Man says:

    And Central Banks all over the world only hold Gold because of……”Tradition.”

  30. Kent says:

    Looks like the PPT still has some juice!

    • Jdog says:

      They will not be able to stop what is coming. You can only spend next years pay checks so long, and then next year comes and you find you cannot pay loans and afford to live too.

  31. Citizen AllenM says:

    Ahh gold, that shiny, fungible portable $100 bill equivalent.

    So misunderstood by people, yet, still coveted and desired.

    The way to think of gold is as a store of value, value with an instant tick price traded 24/7 all over the world, but still just a potential that can be realized within an hour at numerous locations within a 15 minute drive of me. The costs of the transaction are what drives people mad, but in reality, gold is pretty much going to be money no matter what.

    Now, in these years of unwinding the biggest expansion of credit ever seen in global history, the real question is how it will do during this time. And the answer seems to be like watching paint dry.

    Which is better than a down 20% in 3 months, up 5% in one day stock market- that is just crazzzy.

    As for the inflation meme, meh.
    corn $3.73 a bushel.
    wheat $4.95
    oil $46.60

    Food inflation at the source has been pathetic. Everything else is just markup by the MBA crowd. Without medical inflation and asset inflation, the entire economy would be in contraction.

    And now asset inflation looks done, or reflation as it were.

    Seriously, medical inflation is the only thing really holding up in America, and dropping Medicare down to 60 would free up an immense number of jobs for younger people.

    But asset prices cannot be allowed to fall over a couple of years, nohow noway….lol.

    Wages are simply subprime, like the economy that low wages sprawls.

    Meanwhile, well, gold abides, and isn’t subject to being replaced by bitcoins…lol.

  32. Laughing Eagle says:

    Gold is a store of value, and as as long as we have fiat currency, gold will retain value. Gold was $90 an ounce in 1973, today it is around $1240, priced in dollars. Shows how much value the dollar has lost.

  33. CoCosAB says:

    Only those manipulating the FAKE FREE Capitalist Markets knows when the next Big Party will start!

    Gold is just another manipulated metal like any other “asset” in the FFCM. If they want a $5,000 ounce price they will have it.

    Since the last Big Party (2007/2008) they have already gained control of an additional USD 59,5 trn!

    source: Credit Suisse G.W.D. 2017

    Lets just wait to see how much they can control this 2nd Party…

  34. Guitar Hero says:

    Gold is tied at the hip to China, the world’s mega consumer of all commodities (it’s the only reason gold is trading where it is). Gold and copper backed loans are very big in China..

    Yeah, gold might surge during crisis but during any crisis all correlations go to one (DOWN!). Gold will be sold off to satisfy margin calls as seen in the last crisis.

    Unless China starts a new credit surge I doubt gold is going to ‘break out’ , since it’s only over $1000 because of China propping it up. Doubtful that China will print anytime soon for a variety of reasons you can look up yourself (e.g. it wants a respected,stable currency).

    Which leaves a weakening dollar as the last hope for the gold bugs. This has some possibility in the long run, but it could be years. The younger generation give more credibility to bogus cryptos over gold.

    If you missed the last run-up in gold it will likely be decades before gold moves up seriously again. I see much much more downside potential than upside.

    • RagnarD says:

      @Guitar Hero
      Who do you think will become major sellers of physical gold in these days
      of epic money printing? In other words, which current owners of gold, ie folks who likely bought it for good reason, will be so mollified by monetary events in the next few years, that they become sellers?

    • Rowen says:

      Bingo. The price of anything is only dependent on the intersection of buyers and sellers. The only buyers of physical gold that I know are goldbugs, and every year, there are fewer and fewer of them.

      Kinda like collectors of stamps and baseball cards.

  35. Gershon says:

    With the Keynesian fraudsters at the Fed intent on printing away all government and corporate debts, possession of physical gold is a no-brainer.

  36. John M says:

    I’m going to post a link to Grant Williams and Anthony Deden talking about gold. . Anthony Deden runs a small $300 million portfolio where his most important element is making as few mistakes with his clients savings as is possible and there after long term growth.

    Although his fund is relatively small he explains that he keeps very little of his clients funds in US Treasuries but mostly he keeps 35% of the fund in physical gold. Most of the rest of his fund is invested. He has out performed MSCI world index since 2002. I’m not bragging on his part nor do I have any involvement with his company. Watched the whole interview and I found it amazing that a guy that lives in Grindelwald Switzerland would do so much to protect his clients.

    I thought Wolf your other readers might like another view of the world from a guy that professionally holds gold.. Best wishes for the new year


  37. btcroom101 says:

    I think Wolf’s point is that ‘gold’ pretty much tracked the bubble, of course now that all the flippers get margin calls, they got no choice but to sell their ‘gold’ as now we’re in a liquidity problem era.

    As for ‘history’, marc faber does the best of telling the gold story, and gold doesn’t hold during inflation/deflation or anytime, it just does what it does, during the great depression gold stocks did very well ( so even then you could own gold )

    Like many have said gold is insurance, but sadly in USA(west) its not easy to own gold, in asia on every corner is a shop you can buy/sell 24/7/365, no paper-work, no record, and its been this way 10’s of 1,000’s of years, every household has gold ( the real stuff ), most asian countrys the ‘gov’ actually tells people to own gold ( smart gov knows self-directed survival is best )

    Everything eventually can go to zero, even real estate during war can and will go to zero, well stashed gold is probably the only thing in human history that don’t go to zero

    The above said, if your in a civil-war with nothing to eat, then your gold just makes you a target, again getting back to marc faber, his best quote is “No man sticks around during a civil-war to watch his loved ones to be raped, murdered, and eaten”, smart men always leave before the door shuts not unlike germany 1938.

    Civil War is coming to USA, your money, stocks, RE, gold will do you little good once your surrounded by ‘madness of the crowds’

  38. Jim029 says:

    Interesting short term observations.

    The chart going back 50 or 60 years would be even more interesting.

    So from about 1937 to 1967 the price of gold in US$ was around US$35 an ounce – plus a few bucks up or down.

    In 1957 the average wage in the USA was about US$3700 a year or a little over 100 ounces of gold.

    Today the average wage in the USA certainly isn’t 100 ounces of gold.

    And when buying gold one has a lot of choices from physical to paper and even in physical a wide variety of choices.

    Don’t you all wish that your grandparents 50 or 60 years ago had given you a nice shiny US$5 gold coin for your birthday or for Christmas every year?

    Maybe, if you were lucky they would have given you one of the rarer ones or one in perfect condition……….

    How much would they be worth now?

    A common US$5 Indian Head coin in the lowest uncirculated condition is worth about 100 times face value for the cheapest one. Rare ones or ones in better condition are worth considerably more.

    A lot better gift than getting a piece of paper with $5 written on it!!!

    • Wolf Richter says:

      You’re funny: “Interesting short term observations.”

      The second chart goes back to 1995. Since when is 23 years “short-term”? Or are you commenting without having read past the 2nd paragraph?

      You mentioned grandparents. Mine were born in the 1880s. A lot of things happened since, and the world has moved on.

      • Jim029 says:

        Yes, the price of collector coins has soared over the ‘long term’.

        Even since 1995 coins have out performed physical gold and silver.

        Huge returns on investments in gold and even silver coins by a number of times the increase in the value of physical.

        My grandparents were born way back then too and they were alive when I was a young. I would have rather been given one or two of those nice shiny gold coins rather that being slipped a $5 Federal Reserve Note in a Christmas card which, of course, was spent on crap.

        I would have really appreciated being educated on such things as coin collecting and the value of coins when I was younger 50 years ago.

        Yes, the world has ‘moved on’ and that is why we are all in the mess we are now.

      • Older & Wiser says:

        Wolf, have you ever heard of GATA ( and their explanation of what is really going on regarding gold ? Also Jim Rickards´book The Case For Gold is worth reading in depth.

        ” There are no markets no more, just CB interventions ”

        The price to pay when the CBs aren´t able to hold the (artificial) fort any longer will be prohibitive.

        • Wolf Richter says:

          No one complained about market manipulation as long as gold was soaring. People loved it! The more manipulation, the better. But when gold tanked in 2011, suddenly everyone complained about gold being manipulated. Do you see how nonsensical this is?

          Yes, markets are manipulated, all markets, up and down, by all kinds of players, on different sides. No market is more manipulated than the credit market that central banks officially and publicly manipulate with their monetary policies. Gold market manipulation pales compared to credit market manipulation. But the price of gold is not a priority for CBs — though there are a lot of gold bugs who think it is somehow because it fits their narrative that when the price of gold drops, it’s because of manipulation, and when the price of gold rises, it’s because of the natural superiority of gold. I mean, come on.

  39. Iamafan says:

    I’d like to hear from some old Vietnamese on how they used real physical Gold to bribe their way out of Vietnam and their processing center on the way to the US of A.

    I doubt many of us will need gold during our lifetime over here. Don’t forget there are people who must live in crazier part of the world.

  40. walter map says:

    Dec 26, 2018 at 10:47 pm

    Me: “Gold is worth something to other people and is therefore worth that much to me…”

    Atu: “The speculation which you are meditating will take you nowhere without some form of recognisable exchange. So it is no wonder you are confused.”

    Hardly. My apologies for having failed to make myself clear.

    I happily sold off all mine to metal fetishists a few years ago when it peaked, in exchange for things of far greater intrinsic value. It was only of value to me was because it was of value to others, and there was no reason to suspect others would value it even more in the future. It held no sentimental value, no nutritional value, and I am not bound by your traditions regarding religious icons. It was and will always be an unproductive asset, so you’re welcome to it. And if I had plated up a couple of tons of lead you would have bought that too, along with the derivatives contracts, thank you very very much.

    A True Believer in gold is inherently a misanthrope. Survivalists, conspiracy theorists, and goldbuggers are all the same people, who all seem to think humanity is a failure of god or nature. Which happens to be true, sadly, for the most part, but which in no way improves the real value of gold, which is minimal.

    I’m comfortable with being The Fool on the Hill, with the foolish grin sitting perfectly still, who sees the world spinning round and the sun going down, because there are so many Greater Fools who are somehow persuaded that rock beats paper and scissors beat rock. Admittedly, like so many worthies, I will always unable to explain why goldbuggery is mistaken, but perhaps the failure is not, after all, mine.

    All the perplexities, confusion and distress in America rise, not from defects in the Constitution or Confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.

    John Adams

    • Cossu says:

      As long as you describe yourself as the fool on the hill ….
      I’m surprised you haven’t mentioned yet that you can’t eat your Gold.
      I own a lot of physical gold, and art and real estate. I also have a profession that can also arguably be described as the most beneficial to human suffering. I also fund an entire charity on my own.
      Yet I do consider myself kind of a goldbug. A survivalist certainly. Conspiracist? most definitely. Only low IQs are not.
      The world is a big place. I understand that from the comfort of your living room, gold has no value. And you are not alone in this. It’s also a clear indication that you do not know financial history at all.

      • walter map says:

        “I understand that from the comfort of your living room, gold has no value.”

        On the contrary, it does have value to me – insofar as I’ve sold it to suckers at a fat premium. Other than that, well, no.

        “It’s also a clear indication that you do not know financial history at all.”

        I should charge more. Maybe then I’d be appreciated. In the meantime you’re most definitely not getting your money back.

        • Cossu says:

          My average cost is $400/Oz. Hard to not get my money back.
          But I always buy some with my pocket change.
          You don’t even know what currency I use for my PPP lifestyle.
          Without that you can’t even make a diagnosis.
          And I’m a multimillionaire, I couldn’t care less, I still have my portable insurance.

    • Bobber says:

      The attraction to gold is sort of a tradition, like marriage, or nation status. There is nothing forcing it into existence, other than propensities of human nature, which evolve over long periods of time.

      • walter map says:

        True. It’s a metal, a commodity. It does have interesting properties, but so does every other element, and almost nobody hoards scandium. It can be a ‘store of value’, but so is a resevoir, or a library, or a wine cellar.

        All very arbitrary, like political boundaries, units of measurement, religious dogma, or an obsession with The Bieb.

        Chorus: “Shy-neeee!”

    • MD says:

      “goldbuggery is mistaken”, quoth the man who has a few words earlier told us he sold his gold for a handsome price when it ‘peaked’.

      As BJ Simpson put it “the ironing is delicious”. Methinks utterly lost on you though, walter.

  41. Gershon says:

    Platinum is 10X as rare as gold, has much greater industrial usage, and the main sources of supply – Russian and Southern Africa – are dodgy at best from a geopolitical risk perspective. In particular, the larcenous kleptocracies in Zimbabwe and South Africa are intent on looting the mining sector to enrich themselves and their cronies, which gives the mining companies zero incentive to make further investments in the sector, which will result in diminished production downstream. And yet, even with these robust fundamentals, platinum is selling for less than $800 an oz, compared to $1270+ for gold last time I checked.

    To me it looks like a screaming good deal compared to gold.

  42. Jdog says:

    Gold is a commodity, and should be traded as such. Generally durring a period of recession, commodity prices fall along with everything else as liquidity dries up and the need to sell assets to obtain cash increases.

    Bottom line is that QT is causing liquidy to decrease which is putting pressure on non performing companies and loan portfolios. This in turn is forcing asset sales, which begins a deflation cycle.

    When credit expands, money is created. When credit contracts, money dissapears, and you have deflation. Deflation will take its toll on gold along with all other assets.

    • Iamafan says:

      Quote: “Bottom line is that QT is causing liquidy to decrease which is putting pressure on non performing companies and loan portfolios. This in turn is forcing asset sales, which begins a deflation cycle. ”
      I have heard similar things repeated again and again. But no one can show me the numbers. M2 is increasing
      The 6 banks just told Sec. Mnuchin there is no liquidity problem.
      So what are we basing this so-called liquidity problem from? The Mises guys (Salerno et al.) have been claiming True Money Supply has been going down even before QT started. That’s if we can believe them.
      Maybe you can show us where this liquidity problem is. How does QT remove money from the system? Please explain the accounting starting from the reduction of excess reserves.

      • Saltcreep says:


        QE places a floor under prices and a ceiling on rates, since the buying is price insensitve. QT removes those limits, and takes that buying power and price insensitivity out of the market.

        This will have the reverse effect of QE, and unless measures are taken to counter it, will result in asset prices declining across the board and interest rates increasing. Assets support a lot of financial leverage throughout the economy, and as they decline and rates rise, leverage will need to scale back proportionally.

        This appears to be starting to happen these days, and it will be interesting to see if it actually takes root, particularly seeing that long-dated bonds appear not to be buying it at all…

        • Iamafan says:

          Quote: “QE places a floor under prices and a ceiling on rates, since the buying is price insensitve. QT removes those limits…”

          With respect to rates, IOER actually set the floor since banks have no incentive to lend below it.

          With respect to PRICES, I have no idea if there is a floor other than maybe zero.

          Take for example GOLD Prices. They moved up before QE and during QE.

          But the wobbled before even QT stated.

          Then they moved down during the first half of 2018 and moved up the second half – while QT was on. Not sure how to make any sense of this.

        • Saltcreep says:

          As I see it central banks that still enjoy public confidence can set a floor on prices and a ceiling on rates when they’re rolling along with their large price insensitive purchases. But they struggle much more with trying to decide where rates and prices go when they turn into sellers. They then possibly (as I guess is the case now) need to hike just in order to maintain credibility…

          If I were provided with a trillion dollars (that people will gladly take in exchange…) and a mandate to use it to make sure prices stay high and rates stay low, then all I need to do is to buy stuff at appropriate rates/prices, and it will be as demanded, for as long as the money I’ve been provided with lasts.

          If I get nothing, and still get a mandate to make prices stay high and rates low, then I really can’t do aything to make it so, and prices and rates will go where they will.

          It looks to me like renewed central bank QE type intervention is being priced in, maybe even as soon as next year (…

          It will be quite interesting to see how markets and central banks actually react to a new situation of global QT over the coming months!

  43. rj says:

    God’s money needs no explanation.

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