Gold: Is it time to buy?

Gold has been the hot topic of conversation with volatility in the stock market at incredible levels this year and economic uncertainty running high.  The price of gold has risen substantially over the last few months as investor search for a safe haven for looming inflation while they calm their nerves from watching the stock market do its thing.

Part of the reason for the price increase in gold is due to the reactions and behavior of investors as a response to the massive amounts of stimulus that has been pumped into the economy by the Federal Reserve. This unprecedented tsunami of monetary and fiscal stimulus in response to Covid-19 has caused investors to worry that the US Dollar will eventually lose its value amidst potential inflation caused by this stimulus policy.

All this has led to the question should we buy gold as part of our investment portfolio to hedge against a falling dollar?

The price of gold tends to go up when the value of the US dollar goes down.  In March 2020, at the height of the pandemic, the dollar reached its peak of $102.82 and has been slowly retreating since then, creating concern the dollar is “weakening.”  The 20 year average of the dollar is $90.44 Value of a Dollar. The US Dollar is currently trading around $94. As a result of a softening dollar, gold is pushing $2,000 (Historical Price of Gold Index), and recently hit an all-time high.

The last time this happened was in August 2011 when the US debt got downgraded and people panicked.  The price of gold has essentially done nothing for the last 9 years. Meanwhile, the S&P 500 closed at 1,173 on the same day that gold hit $1,850.  Today the S&P 500 is trading at around 3,430 tripling its value.

At its great blowoff top during the Carter era’s global inflation panic (January 1980), gold traded briefly above $800. Thus, it has basically gone up from $800 to $2,000 in 40 years, that’s 2.5 times over 40 years. The Consumer Price Index (an index often used to measure inflation) over the same span of time went up 3.3 times. In January 1980, the S&P 500 was 111. At 3,430 today, it’s up 30 times vs. gold’s 2.5 times. Are you beginning to see a pattern here?

Despite what the gold bugs claim, gold is not a good inflation hedge. It’s an inert metal which produces nothing, yields nothing, and is entirely without intrinsic value. Its putative value exists only by common consent, to the effect that it is allegedly an inflation hedge. That is, gold doesn’t really “go up;” the value of the dollar just goes down.

By far the greatest long-term inflation hedge ever crafted by the hand of man has been mainstream U.S. equities