Methinks gold is rising because investors are anticipating a big second stimulus to counter the rising unemployment rate.
I’m a fan of gold as insurance, especially for high net worth individuals who want some of their wealth “out of the system.” It protects against violent deflationary or inflationary episodes, both of which can wipe out the value of paper wealth very quickly. That said, the premiums to buy that insurance are getting pretty expensive…
Personally, I don’t see how we escape this crisis without a dramatic decline in paper wealth. Credit can’t expand forever, much as the Fed and Treasury would like for that to happen. Eventually the cycle goes into reverse because the government no longer has the balance sheet capacity to absorb more of the private sector’s liabilities. When that happens, asset values crater. The economy is so over-levered in my estimation, its equity value is probably negative. There’s a reason the Dow declined 90% a few years into the Depression. (Stocks have some option value, so they aren’t going to zero.)
The government is aware of how violent deflation can be…ergo, the stupendous show of monetary and fiscal support over the past year. But seems to me all we’re doing is re-inflating the bubble, using the public balance sheet for financing instead of private balance sheets.
Some would argue that so long as there is an “output gap” this won’t be inflationary. I disagree. I think runaway stimulus means the U.S. will eventually face a “sudden stop” situation á la Argentina or Ireland when credit markets lose confidence in U.S. paper. They’ll see the only way they will be paid back is via direct monetization. When that happens, the bid for dollar-denominated assets could disappear more quickly than folks might be willing to admit.
But these dynamics could literally take years to play out. We still print the currency in which our debt is payable. Some consider this a huge advantage. To me, we just have more rope to hang ourselves with.
And I’m not saying this is going to happen. It’s entirely possible we get our act together and let the economy deflate gradually, using stimulus to support a gradual de-levering of the economy. But politically that may not be possible, and so the correction may be forced on us. To hedge that risk, it’s not a bad idea to diversify out of paper wealth into tangible wealth.
BTW, I don’t think you make money on gold in the long run. I think, at best, you protect the purchasing power of the dollars you already have.
Gold futures rose to a new record high of $1,100 an ounce Friday after data showed the U.S. unemployment rate topped 10% in October, raising the metal’s appeal as a safe asset. Gold for November delivery gained 1% to $1,100 an ounce on the Comex division of the New York Mercantile Exchange, the highest level for a front-month contract. The more actively traded December contract rose to $1,101.90 an ounce.