There Once Was the Gold Standard, Now it is Infinite Quantitative Easing

There Once Was the Gold Standard, Now it is Infinite Quantitative Easing

$GLD $XAU $USD

The US once was on a gold standard. This meant people could exchange their Bucks for a fixed amount of gold.

The US moved away from a strict gold standard in the 1930’s, and President Nixon abandoned it altogether in Y 1971.

Since then, the USD has been a “fiat currency.” Meaning its value is not tied to anything tangible such as gold. It is tied to the productivity of US citizens.

A gold standard is inflexible, as it stops the government from doing things like Qe (quantitative easing) aka printing money, which increases the number of USDs in circulation, and could potentially lay the ground for high inflation.

Many would like the US to return to a gold standard, but that will not happen, we are stuck in a world of unlimited QE.

Which means this is a world where you want to own gold.

Investing in gold been going on for up to 5,000 yrs. Some people say technology will change that, not likely.

The fact is, gold has maintained its purchasing power over a huge span of history, and tech will not change it ever. Remember there has been technology all along that 5000 yrs.

Over the last 70 yrs gold’s inflation-adjusted annual return was 2.1%. In other words, gold has held its purchasing power. And that’s what it is supposed to do.

Many argue that gold performed poorly at the beginning of this chaos.

Yes, it declined from 1,700 to 1,470 oz in mid-March. Now it’s back up around 1,700, and likely going higher.

Now given this C-19 chaos and the government’s unprecedented monetary actions to quell it, it is going to perform well long after this crisis fades.

A Key reason people buy gold and drive up the price is inflation fear. This is why gold rose from 800 oz in Y 2009 to 1,900 in Y 2011.

Remember, the Fed started its 1st round of quantitative easing, called QE-1, during that frame. People thought it would cause a lot of inflation, they bought a lot of gold.

The inflation never happened, but gold still climbed higher because people feared it was looming down the road.

Something like that is happening now. But this time, the Federal Reserve is not doing a finite amount of QEing like it did with QE-1. This time, it is an infinite amount of quantitative easing.

And again, people fear this will result in inflation, and reasonably so.

Gold is bound to keep rising in this environment. Because the Fed can print an infinite number of dollars, but like I wrote in column a few weeks ago the Fed cannot print gold.

Also, the price of gold goes up when the federal deficit grows, as it’s doing now. This was the other reason gold more than 2X’d between Ys 2009 and 2011, the government’s annual budget deficit soared into the $1.8-T zone.

Now the government is talking about running the biggest deficit in the history of the United States. Even bigger than in WWII, and that augurs well for gold.

Gold has a lot going for it: QE, inflation fears, and a Giant budget deficit for 3.

But, the biggest reason to own gold is that it smooths out the volatility in one’s investment portfolio. Add a bit of gold, and you will get the same overall returns, and cut the volatility by 50%.

I used to advocate 10 -15%, now I am upping it to 15-20% of of gold in investment portfolios.

In a telephone interview with Bruce WD Barren, a respected economist and Chairman of The EMCO/ Hanover Group, he says: “Yes, the conclusion is correct for the short term but also in the immediate years to come where I can see gold going even going higher! The reason is that the United States has a mountain of debit and it can not afford to raise its interest rates to control inflation. So what is left, real estate (an inflation driver) and the stock market but the lather is already has Price/ Earnings ratios selling disproportionately high. Thus, what is left as a hedge against inflation, not bankruptcy for the United States as the World’s leading financial market can not afford that but precious metals, with the most receptive segment being gold as a balance to what will be rising inflation in the near and foreseeable future. One should expect gold to go above itsd former high of 1,911 an ounce.” 

The reason is better risk-adjusted returns, that is prudence at work.

For our latest Gold Report click here, it is Free!

Have a healthy day, Keep the Faith!

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