Most gold investors will tell you that you need to own gold because they believe US dollar is becoming a fiat currency due to all the money “printing” by the Federal Reserve in the Quantitative Easing (QE) programs. They believe all the money “printing” is going to cause the economy to crash after the world realizes that all the “printing” is not really helping and gold will be the only currency to survive the devastating world economic crash.
I somewhat agree but mostly disagree with this esoteric point of view.
First, the Quantitative Easing programs don’t directly cause inflation. The programs are intended to help banks square up their balance sheets so that they’ll feel more inclined to loan money. It isn’t until the banks actually loan the money that the subsequent inflation kicks in.
In simple terms, you can think of it like your credit card. Your credit card company gives you credit to go an buy things, which is your individual money “printing”. But that credit doesn’t change your life (or effect the economy) if you leave the card in your pocket and do nothing with it. Once you actually go out and buy stuff with your credit card, that’s when the money “printing” gets put into play and subsequently affects you and the economy.
Since the banks are mostly hoarding the money the Federal Reserve is loaning them (keeping their credit cards in their pockets), Quantitative Easing is not yet causing massive inflation.
So the gold investors are missing a major step in how things would likely play out.
The economy has to really take off to the point where banks are back in the business of heavily loaning money for massive inflation to set in and gold to subsequently follow along with inflated pricing.
So from this point of view, if you are investing in gold, you are investing for the economy to continually pick up to the point where this massive inflation kicks in, and that means that the economy is running in high gear (or more accurately in overdrive since the QE is masking the faults in the engine).
Now gold investors do have it partly correct that if the economy crashes, gold will increase in value. But it will be a short lived increase if we really head into a depression, as depressions cause deflation and even gold goes down in value in a depression.
I say there will be a “short lived” increase for gold as the fear of a coming depression will cause money to scramble from the highly inflated stock market into gold as overall market investors look for temporary safe-havens. If the government then steps in and prints even more money, the fear of inflation will kick in with even greater ferocity, causing gold to rise with equivalent vigor.
So investing in gold at this point has a double upside potential. If the economy continues to pick up, inflation will ultimately set in, and gold will follow along by going up in value. If the fear that Quantitative Easing is not helping the economy instead sets in, gold will rise from the demand, as money moves into gold as a protection.
The way I see the economy right now, we are headed for an overly-stimulated economy with heavy inflation, but we aren’t there yet. It’s still years away.
In the mean time, QE is supporting the economy making us all feel safe, which is why gold has seen a dip for the last 2 years.
At some point (possibly as long as 5-10 years from now) the economy will pick up (likely due to some new invention on the scale of the internet revolution) and once it gets going, all that extra QE “credit card” money will get put into play and things will take off in a parabolic fashion. That’s when gold will most likely go through the roof as massive inflation sets in. The Fed will have to drastically raise interest rates to slow the economy. If the takeoff in the economy is simply due to excessive exuberance (as opposed to new invention), that would be the time to move your money from gold related holdings into high interest vehicles as a crash will be likely to follow.
With all the above said, I don’t necessarily put much of my investment money into gold. I don’t like paper gold (gold funds traded on the stock market) and it’s too much of a pain to keep an investment amount of physical gold safe.
I invest in gold mining companies, which see exponential effects, partly directed by gold’s change in value. Currently, in the long term point of view (there has been a recent run-up), the miners have been beaten up badly and are highly undervalued (see my article on investing in Gold Miners over Gold).
I am currently heavily invested in the mining sector (gold, silver, etc.) with a proprietary technique that I have developed over my many years of investing. I plan to open a membership section where I share my technique to help you invest your money wisely. Join my newsletter to be notified when I open up the membership section.