Gold is frequently thought of as protection against inflation, but despite its loss in value over the past year as consumer prices rose and nearly every other asset’s value has been shooting up, the precious metal’s proponents say it still has a critical role in an investment portfolio.
Gold is not the only tool to hedge against inflation, but bitcoin, which is sheer speculation, can’t be an inflation hedge, says noted contrarian and gold bull Peter Schiff, chief economist and global strategist at Connecticut-based Euro Pacific Capital.
“It’s not a real thing. Nobody needs a bitcoin for anything, so there’s no way to know that there'll be any demand for bitcoin in the future,” Schiff told The Epoch Times.
“You buy bitcoin because you think the price is going to go up. And who do you sell bitcoin to? Somebody who thinks the price is going to go up even more. But if people stop believing that the price is going to go up … who do you sell to?”
JP Morgan’s chairman and CEO Jamie Dimon, one of the most powerful men on Wall Street, called bitcoin “worthless,” saying that it has “no intrinsic value.” Bitcoin hit a record high of just over US$66,000 on Oct. 20, whereas a year ago, it was trading around US$13,000.
Consumers are facing rising food prices and the cost of heating their homes and driving their cars continues to get more expensive. Canada’s annual inflation rate hit an 18-year high of 4.4 percent in September after reaching 4.1 percent in August. September was the sixth consecutive month that the consumer price index has climbed faster than the Bank of Canada’s 3 percent upper limit for its inflation target range.
Hedging Inflation
A common strategy for hedging against inflation is owning “real assets” like stocks and commodities, where the goods and services they are used to produce or are associated with go up with price levels over time.
But the principle of owning real assets may even be simpler than that, Schiff said.
“One of the easiest ways people can hedge inflation is to just go out and stock up on stuff,” he noted. He said this could be things like razor blades, toothpaste, and toilet paper—things that will be needed in the future.
Gold will always be in demand for jewellery and also has industrial uses, Schiff says, adding that central banks hold it as part of their reserves.
Over the long run, stocks have been the best-performing asset class and have provided good inflation protection. But they tend to lose value in the face of higher-than-expected inflation in the short run.
Meanwhile, commodities and energy have tended to outperform stocks and bonds in periods of rising inflation.
Deutsche Bank’s head of thematic research Jim Reid noted that during the 1970s—when inflation reached double digits—gold and oil returned over 22 and 19 percent respectively, while U.S. stocks and U.S. government bonds both fell by more than 1 percent.
But Reid also warned that commodities don’t pay dividends or interest and have a poor long-term performance record, especially when compared to stocks.
“As commodities are important factors in production, if they get too expensive for a sustained period, alternatives are sought,” Reid said in an Oct. 5 note to clients.
Canadian money manager Wealthsimple includes a small allocation to gold in its managed portfolios and says the yellow metal tends to rise in price alongside rising costs of living and has historically outperformed the market including when inflation expectations increase.
Gold’s value “will never go to zero” and “a gold coin is value you can hold in your hand,” says John Mauldin, co-founder of Mauldin Economics.
“You don’t need to be a history buff to figure out that gold has been a highly effective inflation and crisis hedge throughout the centuries,” he said in his Oct. 16 weekly newsletter.
Consumers vs Investors
Gold appears to have lost its lustre and is down about 7 percent compared to a year ago, while the last 12 months has been an exceptional period for many other commodities. Crude prices have doubled, aluminum and copper are up over 60 and 40 percent respectively, and agricultural commodities like corn and sugar are up over 40 percent.
U.S. stocks are also at or near record highs, as is the Toronto Stock Exchange.
“During this ‘everything bubble’ that the central banks have inflated, nobody has wanted to buy gold, because gold is the ultimate safe haven,” Schiff explained.
As assets that are considered risky—stocks, commodities—kept rising in price, investors have been wanting to take on more risk, he added.
Schiff said that even though consumers are expecting higher inflation, investors “don’t get it” and are still believing the central banks’ mantra that inflation is transitory.
He said this behaviour can be observed in the market for longer-term bonds, where interest rates remain very low. Even as central banks remain big buyers of these assets, other investors have not demanded higher rates as compensation for higher inflation.
Schiff is among other experts who say that even though officially reported inflation figures have finally started to show notably higher levels, they still don’t reflect consumers’ sentiment that prices are rising even faster.
The Bank of Canada’s business outlook survey released Oct. 18 reported that “almost half of businesses now expect inflation to be above 3 percent over the next two years.” Among those firms, half said the drivers of higher inflation are temporary and most don’t see inflation heading north of 4 percent.
“What we’re seeing now with price increases is the tip of an enormous iceberg,” Schiff warned.
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