Central banks are backing off on their inflation management policies, according to interpretations of their latest statements. Your friendly Gold Enthusiast is not alone in this reading; earlier this week Bridgewater’s co-chief investment officer Greg Jenson told the Financial Times that “[t]here will no longer be an attempt by any of the developed world’s major central banks to normalize inflation rates”.
This is a big deal. After all, one of the US Federal Reserve’s two major goals is to maintain the inflation rate near 2%. Because, you know, high inflation is bad. If the inflation rate went up to 4, 5, or 6%, suddenly a lot of people would find themselves in the poor house. Basically inflation destroys savings because the purchasing power of the dollar you saved years ago is now greatly diminished.
Everyone learns this in Econ 101, but how many actually pay attention…
History shows that gold prices rise to keep pace with inflation over time. So if we move into a period of higher inflation, we can expect gold to go up. That’s why Bridgewater’s Jenson is now forecasting gold to rise to 2000 USD/oz, and urging Bridgewater investors to make bullion a “cornerstone” of their investment portfolio.
Portfolio diversification has advocated carrying a percentage of one’s assets in so-called safe havens. Central banks changing their policies toward inflation isn’t really a black swan, but it sure is a warning sign that things are about to change.
Now might be a really good time to consider increasing positions in areas that typically do well in periods of high inflation, including gold. Consider doing it soon – Germany is already tightening up on personal gold purchasing, a possible canary in the coal mine warning from a country that supposedly values personal freedoms.
The Gold Enthusiast
DISCLAIMER: No securities were mentioned in this article. The author is long the overall gold sector via positions in NUGT, JNUG, a few junior miners, and covered calls on part of the NUGT and JNUG positions. The author may trade options positions in NUGT and/or JNUG in the next 48 hours if market conditions warrant but has no plans to make any other trades in the gold sector in that timeframe.
The SPDR Gold Shares (GLD) was trading at $146.45 per share on Friday morning, up $0.14 (+0.10%). Year-to-date, GLD has gained 18.44%, versus a 24.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Mike Hammer
For 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group.