Posts tagged Gold

Larry Swedroe posted an article arguing that gold is not an asset that can be used to protect against inflation:

How to hedge against inflation (hint:forget gold)

Of course I disagree and the Permanent Portfolio holds gold precisely to protect against inflation.

First let’s be clear that inflation is a deliberate policy decision on the part of the government. To think that the same entity is going to provide “inflation protection” with something like Treasury Inflation Protected Securities (TIPS) is a risk (governments do lie about these things). If they wanted people to be protected from inflation they wouldn’t use it as monetary policy! But they do which means they don’t care what happens to you and others that hold dollars in terms of the effects of inflation. The conflict of interest is simply too much to ignore. You don’t want to hedge your inflation risk with the same currency that is being inflated away. Nor do you want inflation protection from the same group that is causing the problem.

I don’t consider paying protection money to the mob for not burning down my store as a favor. And that’s exactly what what TIPS are: Paying for protection from the same people threatening me with inflation.

Ideally you want your primary inflation protection to be from stocks and bonds which have a way to generate real returns in excess of the debasement of the currency long term. However when you don’t get that (e.g. the 2000s and 1970s) then gold can be a useful asset. Comparing the peak gold price from 1980 as Mr. Swedroe did in his article is cherry picking. It assumes an investor did nothing but a) buy gold and b) did it at the exact top peak of the market. It would be like picking 2000 as the date to suggest that someone shouldn’t own stocks because the past decade they have not kept up with inflation.

In hindsight, the gold price in 1980 looks like it was obvious. But fact is prime rates were over 20% and inflation could have continued to get worse. Likewise, telling someone not to buy stocks because they have had a bad time since 2000 is also hindsight analysis. Stocks could have recovered and continued to go up. We don’t know these things ahead of time.

All assets have risks. Gold, stocks, bonds, t-bills, etc.. All of them have their own risks but their own rewards. So you own a little of each to protect yourself against a catastrophic loss but also capture profits when presented. This is because the future is just not knowable and any one of them can work out to be a savior of a portfolio at any time and for any reason.

So I humbly disagree with Mr. Swedroe on this point. Gold is a great inflation hedge when the chips are down. When currencies are going into the toilet people want gold and not TIPS or other similar products. The facts of history are overwhelmingly in support of gold as a currency protection asset. In a diversified Permanent Portfolio gold works perfectly fine and does a great job to balance the risks of stocks, cash and bonds.