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Gold Happy 50th Anniversary

Commodities / Gold and Silver 2021 Aug 24, 2021 - 07:04 AM GMT

By: Michael_Pento

Commodities Friday the 13th of August 1971 was a very important date in U.S. history. It was the date that set the table for the 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-year anniversary of President Nixon's absolute termination of the dollar's ability to be redeemed for gold. Therefore, I thought it would be a good idea to review gold's performance since that time against some popular investments—especially since the MSFM took this same opportunity to impugn this most precious of metals—as they are always prone to do. And, to also once again explain what really drives the gold market.

Here's a good example of what the media is saying about gold right now: "Nobody wants your rocks, right? I mean, the gold bugs have come up with every story under the sun as to why gold should go up, and it doesn't," that's according to one J.C. Parets, founder and chief strategist, in an interview with Yahoo Finance. He continued: "In fact, over the last year, you'd be hard-pressed to find a worse investment over the last year [than] gold." Joining Yahoo in the poo-poo parade for gold, Bloomberg and the Wall Street Journal ran comparisons between gold and the S&P 500 since 1971--both before and after dividends are factored in. According to the reports, gold beat the nominal return of the benchmark Index but trailed once dividends are factored into the picture. Their conclusions: gold is not a great short-term hedge against inflation, and stocks offer far better protection from a rising Consumer Price Index.

Here's my take: I've said many times before that while I might be a gold bug at heart, there are times when gold can also rip your heart right out. However, the truth is that gold is great hedge against inflation over the long run; but it does even better if you actively manage your allocation weighting.

When looked at with a less biased eye than Wall Street's, there are some salient conclusions that can be drawn from the performance of gold since the Fed broke the gold window in 1971. Gold has not only kept pace with the return on the S&P 500 (before inclusive of reinvested dividends) but has actually beaten intermediate-term bonds over the past five decades. So no, it hasn't become the worthless rock that Wall Street and the Bitcon crowd would like you to believe. Also, there are intervals and cycles when gold vastly outperforms and underperforms the market. Hence, while it is true that gold can be a very profitable investment, it is also true you should actively manage your allocation to PM to hopefully avoid the huge drawdowns that take place.

Some more facts you should know: The July reading on CPI had it rising at 5.4% and the PPI soaring 7.8% Y/Y. That's the highest U.S. consumer price inflation in nearly 40 years and the highest producer prices on record. However, the dollar price of gold is actually down over 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 is because the price of gold depends mostly on the direction of real interest rates. 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 to fall during Q3. I believe this process should intensify next year. Falling nominal and real rates next year should provide the gold market with a strong rebound, especially after the tapering of QE begins.

But what all this proves is that Wall Street is not only biased against gold but hopelessly ignorant as to the real function of 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 offer any interest like fixed income. Gold mining stocks are investments, but the metal itself is not. Gold is a competing currency that must be measured against the return on cash. It offers a viable replacement for dollars that exist in a completely liquid savings or checking account or short-term Treasuries. In other words, the performance of gold is most accurately measured when compared with the returns on holding cash or cash equivalents. Gold should not be compared with stocks or long-duration bonds. However, gold can still very favorably compete with those investments, especially during times of stagflation.

When nominal interest rates are being capped by central bank money printing, the rate of inflation tends to rise, and economic growth tends to falter. That's called stagflation (a combination of slowing economic growth and rising inflation), which is the best environment for gold.

Even though gold is not technically an investment (investments are meant to provide a real, after-tax return on your money), it is the best form of money humans have ever found. And, despite gold being the best place to park your wealth to maintain its purchasing power, it still has a 50-year history of being very competitive with bonds and stocks—even though that comparison isn't a fair one.

Of course, when compared with the Fed's crappy 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, gold proves 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 and unbiased fashion is the only way to arrive at the truth. Gold isn't an investment but still beats U.S. government bonds and the S&P 500 prior to dividends.  And, it trounces the performance of all fiat currencies. Indeed, gold is a great store of value that has proven effective to maintain your standard of living for thousands of years. Knowing how 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 Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”


Michael Pento

Pento Portfolio Strategies

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his 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.

© 2019 Copyright Michael Pento - All Rights Reserved

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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