Since starting The 10th Man in 2014, I’ve written about gold maybe a dozen times. You don’t need to look each essay up—I was bullish every time. I’m still bullish.
Taking a ride in the Wayback Machine, why was everyone so bullish on gold from 2008–2011? Quantitative easing. That seems quaint today, after over a decade of on-and-off money creation, but the thinking at the time was that we would print too much money and it would cause inflation. Took a while, but it eventually did.
They say gold is a hedge against inflation—that it’s a smart risk-management strategy. Maybe it is, but it’s a highly imperfect one. We have lots of inflation, and gold has spent the last eight months going down.
Still, I see gold as a hedge against inflation in the super long run, and one reason I’m bullish on it is because I don’t believe the Fed has the willingness to do what it takes to eliminate inflation. They’re talking tough right now, but there are voices within the Fed calling for a pause in interest rate hikes, saying we should consider the cumulative effect of tightening and the lags associated with monetary policy. This is a matter of much debate on Twitter and elsewhere.
A Second Wave of Inflation
If you look at the two other big inflationary episodes in history, the 1940s and the 1970s, you will notice that there were multiple waves of inflation stretching out over the course of years. We are currently on the back side of the first wave. It is my belief that the Fed will pivot, inflation will moderate for a time, and then we will get a second wave that is even bigger than the first.
Really, though, gold isn’t responding to inflation so much as it’s responding to the Fed. The more the Fed hikes, the lower gold goes. It was up over 3% last Friday on a hint of pausing from Boston Fed President Susan Collins. It doesn’t take much.