Gold prices marched higher in early trading on Monday, up 0.34% to $1,775.20 an ounce as investors sought a hedge against what has increasingly proven to be an erratic Federal Reserve.
Just consider how all over the place the Federal Reserve has been…
First, the Fed said it didn’t intend to raise rates until 2024.
Then, the Fed said it thought maybe rates would go up at the end of 2023.
And, then, days later, James Bullard of the St. Louis Federal Reserve telegraphed an even more aggressive 2022 scenario in an appearance on CNBC last week saying,
“We’re expecting a good year, a good reopening. But, this is a bigger year that we were expecting, more inflation that we were expecting. I think it’s natural that we’ve tilted a little more hawkish here to contain inflation.”
To be clear, the evidence has been everywhere for months now. Since January of this year we’ve seen a steady rise in prices amid multiple rounds of coronavirus stimulus and tight inventories. Now, as the economy reopens, things are really humming. Already, the consumer price index has registered a significant 5% increase just as the producer price index showed a 6.6% jump.
Yet, the Fed is keeping the status quo for the foreseeable future though at least 2022?
Gold: The Ultimate Hedge
As such, investors are stuck in a wait-and-see environment. And, that environment is increasingly causing them to default to gold because gold IS and will continue to be a hedge against bad government policy.
Indeed, gold, in my view, is a critical part of any diversified portfolio. I realize the naysayers complain about how gold has “no intrinsic value” but…I’ll tell you: anything that’s been around for 4,000 years and is still sought after like gold is — well, that asset clearly has value.
In the current environment, investors are smartly turning to gold to begin hedging their portfolios against two possibilities;
- Runaway inflation (a la Jimmy Carter’s 1970s) and,
- A larger-than-expected downturn in the market.
If we see a repeat of the 70s, it will be because the Federal Reserve waited too long to control the inflationary pressures in the current economy. The price for just about everything is going up, up, and away already… and, stock prices–in this scenario–may continue moving higher as investors rush to keep up with inflation. This is where it, again, should be beneficiary to invest in gold since it’s the one thing that should prove to be constant.
Meanwhile, what happens when the Fed decides to turn off the spigot? The market will likely suffer a decline in value. We saw evidence of the market’s sensitively as recently as Friday when the Bullard suggested a tightening as early as 2022 and the Dow plunged 200 points in response.
Whether trying to fight an inflated dollar, an inflated market, gold is typically one of the more predictable assets to help hedge these self-induced, fiscal and monetary policy problems.
Bubbles Are Typically Self Induced… By Our Own Government
One of the most frustrating aspects of these markets is that too often bubbles are created by the government.
Consider the run up in tech stocks and the subsequent bubble in 2000. Or the extraordinarily low interest rates that led to risky behavior and an all-out systemic crisis in 2008. When I look at the present landscape and he talk of multi-TRILLION dollar infrastructure programs (that are really ‘social’ programs because, the Biden administration wants us to rethink the word ‘infrastructure’) combined with a Federal Reserve that actually thought it might be smart to leave rates at record lows until 2024 (come on!) that’s when you’ve got to recognize that for all the various law and economic degrees that our politicians and Fed officials might have… they’re truly lacking in the common sense department.
And, for that reasons, Americans need to be vigilant with their savings and their investments. We cannot allow academics with no real world experience, nor politicians that are entirely overly motivated by their own selfish agendas to gain reelection, to wipe out all that we’ve worked hard for.
As such, remember the importance of diversification and look for ways to hedge your portfolio against moves by the Federal government. I like gold, as well as other precious metals and commodities.
Bottomline, you need to be prepared because, as Ronald Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”