Packing “The Classics”

ECCLESHALL, STAFFORDSHIRE – In yesterday’s note, a reader made the case against gold. Or more specifically, against investing in gold miners over the long term.

While it may feel like inflation is here to stay, they argued, it will not plague us long. And once it passes, gold will lack one of the greatest drivers of its price – the debasement of paper money.

Hopefully, they’re right. Hopefully, the cash in your bank account will keep its purchasing power, and not be evaporated by prices rising consistently for everyday goods and services.

But I’m not so confident. And that’s why in 2019 I dumped my company pension fund into gold miners and buy more with each monthly pension contribution. But it’s important to question our investment theses – to interrogate them until we have true conviction that we are making the right call with our money. So I’m always open to critiques.

I issued my own thoughts yesterday on why I think inflation will not be muted as the reader suggested. But today I would like to stress that it’s not just inflation that makes me bullish about gold. Inflation forms half of the reason I think gold will be going higher in the years to come. The other half, which we didn’t dwell on yesterday, is interest rates.

My main case for gold to do well is that real interest rates – the rate of interest you can earn above inflation at low risk to yourself – I believe, will be going much lower in the years to come. This will be through inflation going much higher, interest rates falling much lower, or a combination of the two. Real interest rates are the true driver of the gold price for they represent the realisable value of paper money at any given time.

When real interest rates are rising, paper money is rising in value. And when they are falling, paper money is getting closer to its intrinsic value: zero. Suffice to say, it’s when real interest rates are falling that gold shines the brightest.

I think the gap between inflation and interest rates – the “spread” – is going to widen significantly. I’m not saying interest won’t rise, only that they will rise at a slower pace than inflation. It’s possible that interest rates could rise significantly – even to double digits – and gold could still boom, provided inflation is running much higher.

The reason I think real interest will be falling in the future is because I do not believe they will be allowed to rise. As the world gets ever more indebted, and growth ever more sluggish, even small rises in interest rates threaten to bring countries down into deep recessions, or even depressions. I do not believe this will be allowed to happen, as it is politically unacceptable. Governments will do their upmost to push real interest rates lower: either through inflation, by spending a boatload and guaranteeing bank loans (as we dwelled upon yesterday), or by getting central banks to push interest rates further and further into the floor.

But enough from me on this for the moment. After all, as one reader emailed me the other day, I’ve been banging on about gold “ad nauseum”…

Here’s one of the responses I received to yesterday’s note:

It was interesting to read where you had ‘gambled’ your pension fund. I know a few twenty-somethings and thirty-somethings who have played their pensions, although not all-in on one fund. In their cases they see some well-publicised shares rocketing away and they see their pension only growing at a few percent above inflation, so they looked for a couple of funds that are outperforming the market. That is fair enough but not my strategy.

I have three gold plays on my list but I have not committed to any of them yet. One of them is that very same “Blackrock Gold and General Fund A Acc”, the other fund is “iShares Gold Producers UCITS ETF USD (Acc)” and the Canadian listed “Wheaton Precious Metals Corp” is the last.

Whilst I am a lot older than you, I am not risk averse (as I have nothing better to do than work till I drop) and all of those three came from Southbank sources. I am just looking at some other gold equity options and I am in no hurry in May as our friends across The Pond may sneeze before the summer and the markets could catch a cold allowing me to pick up some bargains that Shirley Bassey will not be singing about.

This will probably be received as heresy by some, but I confess that I didn’t know it was Shirley Bassey that sang Goldfinger until after reading this letter. In fact, as a certified gold-nut, I probably shouldn’t be admitting this, but… I’ve never actually seen Goldfinger.

Before I’m mauled by a reader for this truly grave error, I defer to another reader using a musical metaphor:

The show ‘Desert Island Discs’ asks what records would you wish to take with you in the hypothetical scenario [that you are marooned on a desert island].

It appears you’re packing the ‘Classics’; questioning the prudence of being swayed by current consensus to favour contemporary ‘one hit wonders’.

NB, Interesting that Bach and ‘The Beatles’ continue to be revered by millions despite centuries or decades of fashionable hubris.

I’ll refrain from commenting about credit distribution [referenced in yesterday’s letter]. But suffice to say, if one believes that we, or the ubiquitous ‘they’, will ‘do the right thing’, ask who f*cked things up to arrive at where we now stand? The Martians?

Maybe a small holding in South America isn’t such a bad choice when our 80 years of apparent peace and stability are exposed as a vulnerable panacea.

Keep up the good work and choose your friends and investments wisely.

I shall do my best!

Thank you for all your responses. I’ll be sharing more of them next week, where we’ll also take a look at the recent crypto chaos….

Wishing you a good weekend,

Boaz Shoshan
Editor, Capital & Conflict

Category: Investing in Gold

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