When I started predicting inflation last year after the Covid Crash, the general consensus was the world was in for deflation as an economic crisis would cause a collapse in demand which would start a vicious cycle of falling prices.
In that model cash is king.
I suggested that the world would print money as if it were confetti and that this would create inflation, likely quite a lot of it. I was and still think that at best we will get at least 50% inflation in the next 3-5 years and if things go poorly then it will be 100% and if the central banks and politicians make a mess of it (how could that possibly happen) then there would be more, a lot more, with a possibility of a lot, lot, lot more than 100% inflation coming down the pipe.
I found a data point last week. Beer has gone up 30 times in the UK since I was born. I’m old but not so old that this number isn’t sobering.
So as we sit firmly in a monetary environment where creating huge amounts of money is the accepted norm it is good to consider how inflation can be a very big blow indeed to our financial security.
Now it appears that the consensus is predicting a flush of inflation after the Covid crisis dies down. So the general opinion has we gone from deflation, to no inflation to a burst of inflation in about 9 months of considering the impact of all the monetary dials going haywire and that makes me think we are actually in for a fairly large amount of inflation already baked in, with room for the monetary authorities to blow the roof off if thing do not go as well as hoped.
So this bodes well for any inflation hedge and Gold is of course the classic one.
So where are we with the Gold price.
Gold had a great run and looked to me to be about to enter a huge vertical rally. I did not. Some might say Bitcoin took over and instead of Gold, enjoyed the vertical move of a haven asset in dangerous times. There is some truth in that, as it is harder to pile into Gold if you are in a panic than it is to load up on Bitcoin and we are after all talking about a fear trade. However, Gold has a big head wind too as a key use case, jewellery demand has been hit heavily by the Covid Crisis and that has definitely held demand down and the price back. That drag is going to go away so that tether is cut and in many parts of the world it will be a natural move to buy gold trinkets if there is a belief that inflation is going to rise substantially even in countries that are no strangers to their governments stealing their savings through currency dilution.
Here is a gold chart with the story so far and I’m using the gold ETF AMEX:GLD which is a tracker of the spot price for this example. I hold a lump of this ETF and Calls on it and lots of miners too. Gold is already a serious part of my portfolio. Everything I look at gets weighed against an inflation theme whether is golden or not.
So Gold didn’t get its break out and Bitcoin went mad instead.
Many will say Bitcoin is going to go to $80,000-$100,000 now and you ain’t seen nothing yet. For me however I don’t see Crypto boiling the oceans this time. The true believers are so sure it will soon but I’m look at the next halvening in 4 years or so for the next vertical. I’m not going to risk the potential downside when there are lots of upsides elsewhere.
For me now is the time to be changing horses, but Im not wedded to any one asset however shiny or sizzling.
If Bitcoin has entered a bear and that is still to be confirmed, money is going to go into other hedges and my feeling is that Gold is an obvious first stop on the road to hedging against the never ending orgy of stimulus coming from all corners.
For me the way to play this is ‘dollar cost averaging.’ Gold is in a bear and it is highly likely to languish or even fall heavily in the short term. As such it is a good strategy to be strategic. This is a long term position not a short term trade, the timing of which is very uncertain. Buying chunks of Gold exposure over the coming months is the sensible way to play this because here is sure to be lots of distractions offering exciting returns elsewhere in the near term. Noiw is a time to play the sizzle but also to start stacking some money slowly but surely away into anything that looks like a cheap inflation hedge.
Apparently temporary inflation is coming. The thing to recall is inflation is very rarely accidental. If you doubt that, then ponder how so many countries in the past with ‘mysteriously’ generated inflation, manage to conjure up all those coins and banknotes just on time to meet the demand for more Zero’s on their currency denomination. Remember government in dire straights pays their people in freshly minted cash paid for by haircutting savings. It generally takes a long time for countries to get their finances straight. There is a very good reason for the coming inflation and that is because its the most stealthy and smooth way to rebalance the trashed balance sheets of the global economy and in the final analysis no one wants the law of the jungle to do it, so inflation is the only tried and tested option. As policy, its is not going to be short lived because the hole that needs filling is going to be huge and post-war like and anyone who wants to know what happens next simply needs to look at what happened to European currencies then. It was ugly. It won’t be anywhere near that bad this time, but it won’t be that pretty either.
Bitcoin might be, as legendary investor Paul Tudor-Jones said, ‘the fastest horse’ but when it takes a rest the old cart horse of Gold is going to make some solid strides. So it might be an out of date mode of transport but that what I’m carefully saddling up for this year.