Gold is only a so-so hedge against inflation. The reason why is because physical gold does not pay a dividend. There are better hedges against inflation. For example, real estate is a much better hedge against inflation because it produces net rental income, as well as appreciate in price.
But what about gold mining stocks during times of inflation? They pay a dividend, don't they? That's income.
Yes, they do; but gold mining stocks are investments in a company. When companies compete, there are winners and losers. You could have the right sector - gold mining stocks - and yet still take a loss, or at least lag the market, if you chose the wrong gold mining companies in which to invest. Gold miners are not a pure play.
Okay, but what about a precious metals mutual fund or a precious metals index fund? These might indeed be reasonable investments during a period of sustained inflation, but you would probably do much better in REIT's or commercial development companies. Real estate offers a significantly higher cash flow.
The bottom line is that gold is no better than a so-so investment during times of inflation.
Where gold really shines is during times of DEFLATION. What? Huh? "Why would anyone want to own gold when prices are falling? I don't get it." The reason why is because gold cannot default.
Most periods of deflation occur during financial crises, like the S&L Crisis, the Dot-Com Meltdown, the Great Recession, and now the Coronavirus Crisis. A ton of companies fail during these financial crises, and these slumps seem to hit about once every twelve years or so.
More than 1,000 savings and loan associations (S&L's) failed during the S&L Crisis. Hundreds of highly-capitalized dot-coms, like Pets.com and Webvan, failed during the Dot-Com Meltdown. Hundreds of financial firms, like Lehman Brothers, and manufacturing companies, like General Motors, failed during the Great Recession. While the factories and the name survived due to a government bailout, the shareholders in GM were essentially wiped out.
Before we are done, hundreds and hundreds of otherwise successful companies will unfortunately fail during this Coronavirus Crisis. Already the Fed has had to buy up hundreds of billions of dollars worth of junk bonds to keep major U.S companies afloat. Despite the help of the Fed, thousands of bondholders will lose most, if not all of their investments.
Much of the wealth in America is invested in bonds. Bonds are the debt of another. Most of the assets held by our banks are loans, which are the debts of another. Mortgage funds, hedge funds, and REIT's have huge investments in mortgage loans, once again, the debts of another.
What happens when these borrowers simply cannot make their payments? How valuable is a bond from a company that just got downgraded from investment grade to junk status because the company is on the verge of failure? Imagine if you were a bondholder of Lehman Brothers in 2008. You would have suffered a near-total loss.
In a deflationary economic collapse. Gold is a supermodel. Gold is one of the few financial assets that is not the debt of another. Gold cannot default.
Therefore, whenever you see the price of gold rising, when the price of most other financial assets is falling, look for a dangerous financial storm cloud somewhere on the horizon.
That storm cloud is the deflationary tidal wave that is poised to crash on our shores in about four more weeks. Please note that I am assuming that the President, the Fed, and Congress will continue to do everything possible to shore up the U.S. economy.
Unfortunately, this imminent financial calamity is not anything that American financial authorities can prevent. You could build the most seaworthy and stable cruise ship on Earth, but it won't protect you from some huge, rogue tidal wave
This tidal wave is coming from China. Chinese demand for raw materials and fine products will shrink so far that tens of thousands of companies worldwide will flounder, as their second largest market suddenly shrinks to just a fraction of its former size.
If you have not read my article, A Huge Deflationary Tidal Wave is Coming Out of China, you simply must read it now. You need to move to cash, if you don't want to lose half of your retirement savings.
In about four-and-a-half weeks, the new, hot story on Bloomberg, CNBC, and Fox Business will be about how far the demand for raw materials and goods by China has fallen. By then it will be too late to save half of your savings.
The price of gold is rising. Winter is coming.
Commercial Mortgage Rates Today:
Here are today's commercial mortgage interest rates on permanent loans from banks, SBA 7a loans, CMBS permanent loans from conduits, and commercial construction loans.
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Hilarious video: Archie Bunker gets a close shave.