The Truth About Gold 

October 2, 2022

Somewhere around 1975, my dad put up a bunch of money to be the silent partner in a Red Ball moving company franchise with a friend. 

Terrible name, Red Ball. But that’s not why the company went belly up a couple years later. 

The late 1970s, that was the last time the US economy was wracked with ridiculously high inflation. Interest rates would eventually get pushed as 21% by Fed Chair Paul Volker. 

Imagine paying 21% a year for a mortgage! Those rates ground the US economy to a halt. Nobody could afford a house, never mind a moving company to move their stuff. 

So I was probably 13 or 14 when my dad said to me “Ya know, if I had just bought gold, we’d be millionaires.”

It was that late-1970s gold bull market that instilled in investors a DNA-level belief that any inflation based economic disruption will send gold prices soaring…

And right on schedule, I’ve been seeing a lot of investment promotions for gold and gold stocks lately. “Gold is about to skyrocket” “Get ready for the gold bull market” and so forth. 

Well, sorry to pop anyone’s wish-there-was-a-gold-stock bubble, but, it ain’t gonna happen. At least not while the Fed is hiking rates and sucking $95 billion a month out of the bond market with its balance sheet reduction (quantitative tightening).  

The Gold Problem

The “buy gold” mantra says that as inflation rises, the dollar weakens and so gold (and really all commodity prices) rise. But that’s not what’s happening….

Check out gold prices over the last year. You’ll see that gold did indeed come into 2022 with some momentum. From October 2021 lows around $1750 an ounce, gold rallied to $2050 an ounce by early March 2022. 

But gold has been down ever since. It’s now below those year ago levels around $1750. Gold started selling off just as the Fed started hiking interest rates. And that is NOT a coincidence. At all…

Today, the US dollar is at record highs against pretty much every currency in the world. Over the last 6 months, good ole USD is up 18% vs the yen and 12% vs the euro. The barbarous relic (gold) is down around 15% in that time.

Cash is king right now. “Go to cash” has been the best investment advice since the Fed started hiking rates. And here’s why…

Gold is not money anymore. In fact, I think cryptocurrency is closer to actual money than gold, at this point. But that’s a different article. 

It’s important to remember that when gold made that historic run in the late 1970s, President Nixon had just signed the Bretton Woods Accord (1972) that took the US dollar off the gold standard. Even a few years later when inflation really took hold, the relationship between gold and money was still strong. 

In the decades since, the relationship between gold and hard currency is long gone. Absent some apocalyptic event that sends the entire world back to the Stone Age, no currency will ever be backed by gold again. 

Stocks Vs Gold

Today, gold is just is an asset, like any stock or bond. It takes cash to buy it. When the Fed is sucking cash out of the economy by raising interest rates, assets lose value. It’s a kind of a deflationary thing: less cash chasing more goods (or assets), prices fall. 

In other words, a gold bull market is a liquidity event, just like a stock bull market. Markets get fat on cheap money. And when money gets more expensive due to rising interest rates, markets start dieting. 

Right now, the game plan for corporations and investors alike is simple: raise cash and wait for asset valuations to become attractive. When it comes time to put cash to work, yeah, gold will rally some. But I guarantee you stocks will rally a lot more. 

Because companies grow. Companies innovate and bring new and improved products to market, thereby growing revenue.Management teams streamline operations and raise efficiency, thereby improving profit margins. More revenue and better profit margins means that companies become more valuable over time. And the stakes you take in those companies, the stock you buy, also increases in value. 

Gold pretty much just sits there, looking shiny. 

Remember the game plan: raise cash and wait for valuations to become attractive.