Gold Happy 50th Anniversary / Commodities / Gold and Silver 2021
Friday the 13th of August 1971 wasa very important date in U.S. history. It was the date that set the table forthe beginning of the end of the USD's world reserve currency status. And,greatly expedited the road to perdition for the dollar's purchasing power.
That means this past Friday was the 50-yearanniversary of President Nixon's absolute termination of the dollar's abilityto be redeemed for gold. Therefore, I thought it would be a good idea to reviewgold's performance since that time against some popular investments—especiallysince the MSFM took this same opportunity to impugn this most precious ofmetals—as they are always prone to do. And, to also once again explain whatreally drives the gold market.
Here's a good example of what the media issaying about gold right now: "Nobody wants your rocks, right? I mean, thegold bugs have come up with every story under the sun as to why gold should goup, and it doesn't," that's according to one J.C. Parets,Allstarcharts.com founder and chief strategist, in an interview with YahooFinance. He continued: "In fact, over the last year, you'd be hard-pressedto find a worse investment over the last year [than] gold." Joining Yahooin the poo-poo parade for gold, Bloomberg and the Wall Street Journal ran comparisonsbetween gold and the S&P 500 since 1971--both before and after dividendsare factored in. According to the reports, gold beat the nominal return of thebenchmark Index but trailed once dividends are factored into the picture. Theirconclusions: gold is not a great short-term hedge against inflation, and stocksoffer far better protection from a rising Consumer Price Index.
Here's my take: I've said many times beforethat while I might be a gold bug at heart, there are times when gold can alsorip your heart right out. However, the truth is that gold is great hedgeagainst inflation over the long run; but it does even better if you activelymanage your allocation weighting.
When looked at with a less biased eye thanWall Street's, there are some salient conclusions that can be drawn from theperformance of gold since the Fed broke the gold window in 1971. Gold has notonly kept pace with the return on the S&P 500 (before inclusive ofreinvested dividends) but has actually beaten intermediate-term bonds over thepast five decades. So no, it hasn't become the worthless rock that Wall Streetand the Bitcon crowd would like you to believe. Also, there are intervals andcycles when gold vastly outperforms and underperforms the market. Hence, whileit is true that gold can be a very profitable investment, it is also true youshould actively manage your allocation to PM to hopefully avoid the hugedrawdowns that take place.
Some more facts you should know: The Julyreading on CPI had it rising at 5.4% and the PPI soaring 7.8% Y/Y. That's thehighest U.S. consumer price inflation in nearly 40 years and the highestproducer prices on record. However, the dollar price of gold is actually downover 6% this year and down about 10% over the past 12 months. And the miners,as represented by GDX, have shed nearly 14% this year and are down 25% y/y. So,why is this most-beloved inflation hedge performing so badly of late? That isbecause the price of gold depends mostly on the direction of real interestrates. Real rates had been rising in the first two quarters of this year,forcing gold lower. However, the direction of real interest rates has begun tofall during Q3. I believe this process should intensify next year. Fallingnominal and real rates next year should provide the gold market with a strongrebound, especially after the tapering of QE begins.
But what all this proves is that WallStreet is not only biased against gold but hopelessly ignorant as to the real functionof the precious metal. It is crucial to understand that gold isn't really an investment,like stocks or bonds. It doesn't grow its earnings, or pay dividends, or even offerany interest like fixed income. Gold mining stocks are investments, but themetal itself is not. Gold is a competing currency that must be measured againstthe return on cash. It offers a viable replacement for dollars that exist in acompletely liquid savings or checking account or short-term Treasuries. Inother words, the performance of gold is most accurately measured when comparedwith the returns on holding cash or cash equivalents. Gold should not becompared with stocks or long-duration bonds. However, gold can still veryfavorably compete with those investments, especially during times ofstagflation.
When nominal interest rates are beingcapped by central bank money printing, the rate of inflation tends to rise, andeconomic growth tends to falter. That's called stagflation (a combination ofslowing economic growth and rising inflation), which is the best environmentfor gold.
Even though gold is not technically aninvestment (investments are meant to provide a real, after-tax return on yourmoney), it is the best form of money humans have ever found. And, despite goldbeing the best place to park your wealth to maintain its purchasing power, itstill has a 50-year history of being very competitive with bonds and stocks—eventhough that comparison isn't a fair one.
Of course, when compared with the Fed'scrappy currency, gold shines brighter than a supernova. For proof of this fact,it took just 35 dollars to buy an ounce of gold in 1971; but today, it takes about$1,800. Sadly, since 1913 the dollar has lost 96% of its purchasing power. Hence,you must evaluate gold in a fair and honest fashion. When doing that, goldproves its value over many millennia. No fiat currency can do that. In fact,all eventually have gone to zero.
Testing a theory in an objective andunbiased fashion is the only way to arrive at the truth. Gold isn't aninvestment but still beats U.S. government bonds and the S&P 500 prior todividends. And, it trounces the performanceof all fiat currencies. Indeed, gold is a great store of value that has proveneffective to maintain your standard of living for thousands of years. Knowinghow to trade gold can make it even more precious.
Michael Pento produces the weekly podcast “The Mid-week Reality Check”,is the President and Founder of PentoPortfolio Strategies and Author of the book “TheComing Bond Market Collapse.”
Respectfully,
MichaelPento
President
PentoPortfolio Strategies
www.pentoport.com
mpento@pentoport.com
(O)732-203-1333
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MichaelPento is the President and Founder of Pento Portfolio Strategies (PPS). PPS isa Registered Investment Advisory Firm that provides money management services andresearch for individual and institutional clients.
Michaelis a well-established specialist in markets and economics and a regular gueston CNBC, CNN, Bloomberg, FOX Business News and other international mediaoutlets. His market analysis can also be read in most major financialpublications, including the Wall Street Journal. He also acts as a FinancialColumnist for Forbes, Contributor to thestreet.com and is a blogger at theHuffington Post.Prior to starting PPS, Michael served as a senior economist and vice presidentof the managed products division of Euro Pacific Capital. There, he also led anexternal sales division that marketed their managed products to outsidebroker-dealers and registered investment advisors.
Additionally, Michael has worked at an investment advisory firm where he helpedcreate ETFs and UITs that were sold throughout Wall Street. Earlier inhis career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses.Michael Pento graduated from Rowan University in 1991.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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