MAY 24, 2018
The reason most investors in gold throw in the towel and sell is “The price just isn’t going up and other things are.”
In the late stages of a bubble, it gets downright exhausting when all the data tells you one thing and the market ignores it all. But this is the nature of bubbles and mania. Once a market has unglued from its fundamentals, there’s no telling when that will end.
But it always does. Usually because of a catalyst nobody saw coming, and usually far too fast to react to in real time. Positioning yourself for the coming crash is the easy part. Having the patience and mettle to wait it out even as risk assets continue to rise is what mints successful long-term investors.
The fundamental drivers of American inflation are arguably as strong or even stronger now than they were in 1968.
US demographics bear similarity to that time; in the late 1960s, the baby boomers were young and rebellious. The London Gold Pool was ending. The free-trade for gold didn’t get completely launched until about 1974, but some gold products (like certificates) were free-trading by the late 1960s and gaining popularity. Most importantly, it was happening as rates and inflation rose.
The Trump administration faces a rate hiking cycle, the late stage of the business cycle, and the end of a twenty-year bear market in money velocity. The business upcycle has featured huge stock market buyback programs with only modest expenditure on business expansion. That’s very inflationary.
What’s essentially happening is the US private economy is expanding but overheating, and the US government is pushing rates higher with its huge budget deficit.
An inflationary genie is poised to leap out of the bottle in a very big way. The US private economy should continue to grow in the 3% range, but inflation will soon emerge. The big loser in this situation is the US government, and rightly so.