Photographer: Christopher Pike
When I started predicting inflation last year after the Covid crash, the general consensus was that the world was in for deflation as an economic crisis would cause a collapse in demand which would start a vicious cycle of falling prices. In that model cash is king.
I suggested that the world would print money as if it were confetti and that this would create inflation, likely quite a lot of it. I thought, and still think, that at best we will get at least 50% inflation in the next 3-5 years, and if things go poorly then it will be 100% and if the central banks and politicians make a mess of it (how could that possibly happen?) then there would be more, a lot more, with a possibility of a lot, lot, lot more than 100% inflation coming down the pipe.
I found a data point last week: beer has gone up 3,000% in the UK since I was born. I’m old but not so old that this number isn’t sobering.
So as we sit firmly in a monetary environment where creating huge amounts of money is the accepted norm, it is good to consider how inflation can be a very big blow indeed to our financial security.
Now it appears that the consensus is predicting a flush of inflation after the Covid crisis dies down. So the general opinion has gone from deflation, to no inflation, to a burst of inflation in about nine months of considering the impact of all the monetary dials going haywire, and that makes me think we are actually in for a fairly large amount of inflation already baked in, with room for the monetary authorities to blow the roof off if things do not go as well as hoped.
So this bodes well for any inflation hedge, and gold is of course the classic one.
So where are we with the gold price?
Gold had a great run and looked to me to be about to enter a huge vertical rally. It did not. Some might say bitcoin took over and enjoyed the vertical move of a haven asset in dangerous times instead of gold. There is some truth in that, as it is harder to pile into gold if you are in a panic than it is to load up on bitcoin—and we are, after all, talking about a fear trade. However, gold has a big headwind, too as a key use case; jewelry demand has been hit heavily by the Covid crisis and that has definitely held demand down and the price back. That drag is going to go away so that tether is cut and in many parts of the world it will be a natural move to buy gold trinkets if there is a belief that inflation is going to rise substantially, even in countries that are no strangers to their governments stealing their savings through currency dilution.
Here is a gold chart with the story so far, and I’m using the gold ETF SPDR Gold Trus (GLD), which is a tracker of the spot price for this example. I hold a lump of this fund and call option on it and I hold a lot of mining stocks too. Gold is already a serious part of my portfolio. Everything I look at gets weighed against an inflation theme whether is golden or not.
The gold ETF tracker shows the story so far
So gold didn’t get its break out and bitcoin went mad instead:
Bitcoin broke out and left gold behind
Many will say bitcoin is going to go to $80,000-$100,000 now and you ain’t seen nothing yet. For me, however, I don’t see crypto boiling the oceans this time. The true believers are so sure it will soon but I’m looking at the next halvening in four years or so for the next vertical. I’m not going to risk the potential downside when there are lots of upsides elsewhere.
For me now is the time to be changing horses, but I’m not wedded to any one asset, however shiny or sizzling.
If bitcoin has entered a bear—and that is still to be confirmed—money is going to go into other hedges and my feeling is that gold is an obvious first stop on the road to hedging against the never-ending orgy of stimulus coming from all corners.
For me the way to play this is dollar cost averaging. Gold is in a bear and it is highly likely to languish or even fall heavily in the short term. As such it is a good strategy to be strategic. This is a long term position not a short term trade, the timing of which is very uncertain. Buying chunks of gold exposure over the coming months is the sensible way to play this because there are sure to be lots of distractions offering exciting returns elsewhere in the near term. Now is a time to play the sizzle but also to start stacking some money slowly but surely away into anything that looks like a cheap inflation hedge.
Apparently, temporary inflation is coming. The thing to recall is that inflation is very rarely accidental. If you doubt that, then ponder how so many countries in the past with ‘mysteriously’ generated inflation manage to conjure up all those coins and banknotes just in time to meet the demand for more zeros on their currency denomination. Remember, governments in dire straights pay their people in freshly minted cash paid for by haircutting savings. It generally takes a long time for countries to get their finances straight. There is a very good reason for the coming inflation and that is because it’s the most stealthy and smooth way to rebalance the trashed balance sheets of the global economy, and in the final analysis no one wants the law of the jungle to do it, so inflation is the only tried and tested option. As policy, it’s not going to be short lived because the hole that needs filling is going to be huge and post-war-like, and anyone who wants to know what happens next simply needs to look at what happened to European currencies then. It was ugly. It won’t be anywhere near that bad this time, but it won’t be that pretty either.
Bitcoin might be, as legendary investor Paul Tudor-Jones said, ‘the fastest horse’ but when it takes a rest the old cart horse of gold is going to make some solid strides. So it might be an out of date mode of transport but that is what I’m carefully saddling up for this year.
Clem Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.
I am the CEO of stocks and investment website ADVFN . As well as running Europe and South America’s leading financial market website I am a prolific financial writer. I