Is gold headed higher or lower? Higher, most likely, as long as the world continues to fall apart in slow motion. But really, who knows?
What has become clear to me -- a former gold skeptic -- is that railing against gold as a purely sentiment-driven, fundamentals-less asset is a technically correct but ultimately meaningless accusation.
And in the sweeping conundrum that has become our financial and investing landscape, that may be one of the best reasons yet to own the barbarous relic.
Oh, how wrong I was
Let's be clear: I've been terribly wrong on gold's direction.
In fact, in mid-2009, I attempted to beat back the gold bugs and inflation fearmongers with what I viewed as a club o' logic.
Expecting a weak economic recovery, I argued that inflation and money velocity wouldn't reach worrisome levels, despite the Federal Reserve's ballooning balance sheet. Nor did I envision failed U.S. Treasury auctions. All told, I expected that gold-hoarding hyperinflationists would soon be shuffling back to their bunkers, mourning the lackluster performance of their shiny yellow totem.
That was June 3, 2009, when the SPDR Gold Shares
Yikes. Why did my forecast so badly miss the mark?
It wasn't my economic expectations. U.S. inflation averaged -0.4% in 2009, 1.6% in 2010, and 2.8% for the first half of this year (tame even when accounting for the dubious nature of government numbers). Meanwhile, money velocity, or the rate at which money moves through the economy, first rallied anemically and then stalled well below precrisis levels. Finally, the yield on 30-year Treasuries has come down from 4.45% to just above 3%, signaling strong U.S. dollar demand and scant inflation fear.
So if these usual macro suspects haven't been driving gold higher, what then?
A logical fear
I don't know how many gold fans gradually understood that the Fed's quantitative easing was only half the inflation equation, the other part being increased bank lending, which clearly wasn't in the cards. What I do believe happened is that fear quite rationally shifted to the longer term. This is where I was caught off guard. It's also the precise location where I can board the gold express without fearing that I'm stepping onto the crazy train.
The issue here is simple. The U.S.' fiscal house isn't something you'd want in your town, never mind on your block. A combination of stimulus spending, structural changes in the job market, loopholes of all variety, and the largest of all elephants in the room -- entitlements -- makes it difficult to envision a future that doesn't involve money printing. And I don't mean goose-the-market, Ben Bernanke-style QE; I'm talking about a bona fide we're-printing-paper-to-meet-our-debts event.
Staring down the barrel of such a future, gold isn't speculative. Rather, it has all the appeal of common sense.
Meanwhile, Europe offers us a preview of our own coming days. Their debt crisis threatens to rock the global financial markets well beyond the drubbing we've seen in recent months. Yet European officials appear capable of no greater assurance than "we're getting ready to get ready to make a plan."
In this environment, it's not difficult to see how and why gold truly has taken the mantle of an alternative currency, free from political and fiscal mismanagement. Sure, one can question the practicality of gold as a currency in today's world, but exactly how practical is the euro looking these days?
What's that, naysayers?
Headlining the detractor's thesis is the observation that gold is worth no more or less than what people feel it is worth. After all, it generates no cash flow, and that means its intrinsic value is somewhere between nonexistent and your second cousin's best guess.
Hey, I won't argue. But how's that so different from any other asset class?
In the case of stocks, what is the price-to-earnings multiple but a reflection of investor sentiment? Yes, equity investors can avow that they're buying a piece of a business, which throws off profits at regular intervals, but does that business deserve to trade at two times, one-and-a-half times, or equal with earnings growth? Valuation, put simply, is not a science. Instead, it is the sum total of human emotion and historically informed guesswork. It can also be the difference between a 50% gain and a 50% loss -- exactly the sort of extreme outcome that the equities-only champions derisively pin on gold.
Ultimately, calling for gold's demise because its price is based on sentiment is tantamount to indicting the entire financial system as a house of cards. Of course, there may be sage wisdom to that observation. Yet insofar as there is, you probably want to own, well, a nugget or two of gold. Even in the darkest of times, we'll be forced to place belief in some financial instrument, and it's unlikely to be chia seeds or alpacas.
So, yes, as long as U.S. and European policymakers dither and the Dow Jones Industrial Average
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However you proceed, remember, gold is a bet on an increased level of crazy in the political and fiscal world. So how much time do you want to waste?