The weekend is approaching, and I am about to attend another event on my wife's busy social calendar. Already I know how the cocktail party is going to play out: The women will end up on one side of the room talking about practical, real world events--such as running a household. The men will be quarantined to a corner to discuss the nebulous future of money, politics, religion, and other international events. In fact, I already know where the conversation is going to lead. I'm like a broken record.
Inevitably, I will launch into a dissertation about the world's growing globalization, the role of central bankers and cooperating foreign governments in "fixing" interest rates, the associated imbalances that have necessarily followed, and the difficulties of investing in a world of disequilibrium--a world in which one society does most of the consuming and little of the saving while a larger, poorer culture does most of the saving and little of the consuming. As investors we must navigate through this dire macro-economic scenario that economists have been warning about for years, but that we have chosen to ignore because seemingly it never comes to pass.
Eventually someone will pin me down to ask my investment preferences given these conditions. I will hedge myself and reply that I like all commodities, real estate in developing parts of the world, and select technology, but that none of these groups is extremely cheap now. Then I will hear back that tech is always too risky, that commodities are difficult for the little guy to buy, and that overseas real estate is just too "foreign." After being pushed into a corner I will "confess" that I like gold.
I am prepared for the onslaught of insults. Some wise-guy will embarrass me by laughing out loud and telling me the story of his father who bought gold at $800 per ounce over twenty-five years ago and who is still storing it in his safety deposit box waiting to achieve break-even. He will lecture me about how gold is a useless relic with no real value. In fact he will tell me that since gold yields nothing it is the last investment in the world he would every make.
At this point I will want to jump up and yell out, "Gotcha!" But I won't because my wife won't let me (she actually enjoys these parties and would like to remain on the invitation list). Instead, I will agree with everything that the wise-guy tells me--not to be polite--but because he is right. Gold is the last investment anybody should make. Or, put another way, the only time anyone should ever invest in gold is when no alternative investments can be found. Gold is the investment of last resort. Why place money in gold when there are plenty of sufficient returns to be had elsewhere?
By now my aim will be to trick this wise-guy into admitting that he should invest in gold. First, I will ask him if he would invest in bonds at today's prices. And he will tell me, "Not on your life." He knows the inflation rate is understated and that bonds yield no real return. Then I will ask him his view of today's real estate prices, and before he chokes he will blurt out that today's prices are obscene. And I will agree. Finally, I will query him about his take on stocks, and he will say that though stock prices are lower now than in the year 2000, they are still not cheap--certainly not by historical standards. He might even indicate to me that he's worried about this country's future--its large trade deficit, its enormous public obligations, and its overleveraged private sector. And I will nod in agreement.
Next I will ask which investment he favors, and he will likely have no response. In fact, he might tell me that he prefers cash while waiting for better opportunities. (Like all those on the sidelines, he is waiting for the dreaded "reckoning day," the day on which all assets go on fire sale). It is then that I am going to slam my point home. If the Fed continues to print the dollars that he is holding at a seemingly ever-expanding pace, it will be difficult for him to maintain his relative wealth. I will tell him that cash is not an investment--it's just a weak promise. As the Fed prints more, the promise gets weaker by the day. Eventually, he will be forced to agree. In his heart he knows that "Cash is King", but only when it's in short supply. Until this state passes--the one replete with overpriced assets in an ever-growing pool of liquidity--denominating assets in gold might not be such a bad idea.
It's usually about this time when I discover that the wise-guy might be a little wiser than I had anticipated. He might ask, "What makes you so sure that the Fed will continue printing money in the face of a percolating inflation?" Now I am in a little bit of trouble because I can't be sure of anything, at least not in the short run. The Fed is essentially controlled by one person, a government bureaucrat, and his short-term actions are often hard to predict. But one thing that I am sure of is that this Fed Chairman knows a little bit about written history. He recollects the events leading to the Great Depression, and he knows that a tight monetary condition accompanied by a large pool of debt does not produce a happy ending.
Given our country's large debt relative to its GDP, I feel pretty confident that the printing presses will fire up again. In a democracy in which politicians are elected for short terms, it's politically infeasible to make voters suffer for too long. Over the near term, though, it's hard to predict what one man and his board of "yes" men at the Fed might do. So I am forced to concede the point that at any time, if the Fed tightens too much, then the price of gold price will suffer a meaningful correction. By now the wise-guy feels vindicated because he will have made me admit that gold might be a bad investment for a short while.
And that's when the party usually ends. The wise-guy will leave on a positive note, validating his theory that cash could be king again. And if it is, he believes that he will deploy his cash to buy other distressed assets--but not gold. The problem is that in a highly leveraged economy, it's unlikely that the Fed will ever permit the price of those other assets to fall to bargain levels at which the wise-guy will deploy his monies. Instead, the Fed will re-inflate and gold will soar. Cash will continue to lose its purchasing power.
It is an argument that I never will be able to win. As soon as I utter the words, "I like gold," I will be categorized as a gold bug, someone out of touch with reality. Another doomsayer. Frustrated, I will return home thinking of all of the words that I should have responded with but didn't.
I should have told him that my investment career has taught me that there are two ways to strike it rich: one is to earn money at a faster rate than everybody else, while the other is to "preserve" your wealth while everyone else loses theirs. I would admit that no one builds wealth holding gold, not over the long run. Gold is just a means of preserving relative wealth, not a long-term strategy for increasing it. I wanted to say that it's my complete intention to sell my gold and convert it into a more productive asset class when I can find other reasonable investments. I don't know when it will be, but I do know that it will be. Until then I will hold my gold.
It is my belief that gold will be the last bubble to pop as this silly period of money printing finally ends. I will have exited gold before the completion of its parabolic price rise. By then productive investment opportunities will have availed themselves and I will have pursued them. As I am selling my gold and purchasing these potentially valuable investments on the cheap, I will reflect on all the wise-guys whom I have met. A few will have let their emotions get the best of them and will have bought gold near the tail end of its rise. For a short time they will seem very astute. Others will never invest in gold, but they will have enough sense to use their devalued dollars to buy these reasonably-priced, alternative assets. And then there are those who will do nothing.
You must understand that this circumstance doesn't present itself often; it is a peculiar environment characterized by large amounts of debt, ample liquidity, and grossly overvalued asset classes. It is most easily treated with a tonic of even more liquidity. I have only seen it twice in my lifetime--once in the early 1970's, when I was too young to appreciate it, and again today. It seems to occur only at times when things are somehow "wrong" in the world. But I'll leave that assessment for the economists.
In my heart I know that the wise-guys, and all of their anti-gold rhetoric, will eventually be proven right. I can't wait for that day to come so that I can rid myself of this useless relic of a metal. It's living hell being a transitory gold bug.
