I hear it almost every day … and it’s possibly the most-frustrating piece of misinformation spouted by the financial media.
You’ll have heard it, too, no doubt … so often, that it might even have been the basis for some of your investment rationale.
Here it is: Gold is a hedge against inflation.
Hear me now, dear reader … That. Is. Dead. Wrong
Gold is not a hedge against inflation. I have the statistics to prove it, and I’ll share them in a moment.
But gold is a hedge … one that is more powerful than a simple hedge against inflation. It’s a hedge against the biggest wealth-destruction machine on the planet … America’s Federal Reserve.
The Mid-’70s Dollar Crisis Drove Gold Higher – Not Inflation
First, let’s jump back to the 1970s and America’s inflation scare. As inflation took root, gold soared … and, thus, we have the fountainhead of misinformation.
People have conflated the two because they both happened simultaneously. But that’s a very simplistic dot-to-dot connection.
When you look at the charts, and go back to determine what was happening in America economically at the time, you see a markedly different truth …
Notice the two vertical, black lines. That marks a period when the Carter administration began talking down the U.S. dollar as a way to deal with America’s limp economy and its high unemployment rate. A weaker dollar would, it was hoped, spur U.S. export activity, fire up the economy and, as a result, lead to a corporate hiring binge.
That didn’t work so well. And in the summer of 1977, the second black line, Treasury Secretary Michael Blumenthal made comments after a meeting in Paris with the OECD nations, which signaled in no uncertain terms that the U.S. would not stand in the way of the German mark and the Japanese yen appreciating against the dollar.
He explicitly telegraphed to the world that the U.S. government wanted the dollar to plunge … and the market obliged. You can see from the chart just how quickly the dollar tanked.[adcode]
You can see what gold did. From the summer of ’76 to the summer of ’77, gold meandered with the dollar. But after Blumenthal’s dollar bomb, gold soared.
Inflation did begin to race higher during this period, but that was just a sideshow freak to the action inside the main circus tent.
Indeed, look at the chart below and ask yourself this: If gold is, as the know-nothing media insist, an inflation hedge, why did gold prices flat-line from 1987 to almost 2002? (I threw in a couple of black lines again to show you the period I’m referencing.)
Was there really no inflation during the span?
Of course there was. Inflation eroded 37% of the value of your 1987 dollar. Yet gold prices went nowhere – in fact, gold lost a good bit of ground.
And consider what has occurred in the past decade … inflation has stolen about 20% of your dollars, but gold is up nearly 500%.
So much for the idea that the two are correlated. The fact is, they’re actually very poorly correlated. I had investment-research firm Ibbotson Associates run a correlation study for me on gold and the dollar, and it turns out the correlation is just 0.09 going back to 1978 – i.e., they are about as correlated violins and maple trees (while violins are often made from maple wood, the two aren’t synonymous.)
The real correlation to gold … is the dollar. And it’s a very tight correlation. Look at this …
What you clearly notice here is that the dollar and gold move inversely. As the dollar goes down, gold goes up … as the dollar goes up, gold goes down. The correlation between the three decades since 1980 is -0.7%. That’s a very strong inverse correlation – on the financial see-saw, the opposite of gold is the dollar, not inflation.
Smart Finances Equals Lower Gold; Dumb Finances Equals Higher Gold
Think back to the Clinton years (1993-2001) for a moment. Do you recall what was going on economically in America?
The U.S. balance sheet was improving. In Clinton’s second term, we were talking about budget surpluses (real or imagined) – and the U.S. dollar rallied by more than 30%. Gold, in turn, lost 25% – yet again a very tight inverse correlation of -0.5.
And what happened afterwards? 9/11 happened … the U.S. launched two massively costly wars … politicians began spending taxpayers’ money with abandon … Baby Bush promised prescription tax cuts and prescription drug plans that destroyed the U.S. balance sheet … Obama and his New Socialists piled on with bailouts and costly healthcare coverage.
Today, America’s debt stretches beyond comprehension. The dollar index has lost 35% since its last high in 2002. And we all know where gold has gone – up.
As for Inflation … it hasn’t really been an issue.
In fact, ever since the global financial crisis, economists, the media, talking heads and Fed officials have been more worried about deflation - and yet gold has soared.
Here’s a final chart to show you graphically just how bad Bush and Obama have been for the dollar – though how good they were, unintentionally, to gold. Correlation in the Bush-Obama years … nearly -0.8 – a huge inverse correlation.
To me, it’s quite clear that gold’s real kryptonite is the dollar, not inflation. So, what does it all mean to you, the investor?
The Gold to Own for Your Security
First, forget about inflation. It’s a non-issue as it relates to gold.
But U.S. fiscal troubles are systemic and endemic … and, as history demonstrates, they have a direct impact on gold’s direction.
If you believe, as I do, that America’s financial quagmire will take years, if not decades, to repair – assuming politicians ever have the guts to really repair it – then you want to continue to buy and hold gold until the day you hear Congress or the President verbalize an honest plan to eradicate our debts.
Until that day, the dollar has a long slide ahead. And gold is the proven antidote.
Foremost, own physical bars and coins. They are the pure play on gold prices. The cheapest prices I’ve found online for bullion are at Boston Bullion (bostonbullion.com). Neither I nor The Sovereign Society receives any commissions or payments for mentioning Boston Bullion. I do so only because I’ve bought most of my gold there, and I know it’s cheaper than any other place I’ve looked.
And own a few good gold miners, too, like Goldcorp, a stock we’ve owned in The Sovereign Investor portfolio since 2005, and on which we’re up more than 230%. Gold stocks today are cheap, and they represent huge, leveraged upside as the price of the yellow metal rises.
Next time you hear some weenie on TV tell you gold is an inflation hedge, turn to the Cartoon Network … because there’s more truth in Scooby Doo.
Until next time, stay sovereign…
Jeff D. Opdyke
P.S. Are you’re happy with the way things are going? Do you think the Fed is a fine and honest steward of the dollar? Is the Obama Administration bringing transparency to Washington. Do you think Wall Street will never, ever put their interests before “Joe Public” again? The Fed yesterday pledged to keep interest rates at record lows until late 2014. The only stark beneficiary of the Fed’s commitment to stay “lower for longer” is gold. So, I suspect that you, too, smell something burning in Washington. If you’re serious about financial freedom, but you’re struggling to wrap your head around this challenging economy, if you’ve been overwhelmed by the idea of going “offshore” and if you’re concerned about the future, I urge you to read this.
On This Day, the Market Will Crash
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