Investing in Gold: It Makes Sense when Inflation Is High

The gold price is off and running this week. But, money creation isn’t listed as a cause, instead, “Policy volatility is off the charts, and it’s especially emanating from the White House,” said Johan Jooste, chief executive officer at Pangaea Wealth AG. “The policies look to be either accidentally or deliberately dollar-weakening, which is a positive for gold.”

The President appears to be staging a coup of the Eccles Building attempting to put some central bankers on the job who will lower rates, which means create more money. Of course it’s the Fed that creates money and, in turn, price inflation. The money supply has marched steadily upward since Nixon snipped the last thread to a gold standard. But the President wants more money (and lower rates).

Bloomberg provided this belly laugh: “given decades of experience showing inflation stays lower, and growth is steadier, when interest rates are set by independent central bankers — some investors are now increasingly betting the president’s assault on the Fed will put the US economy on a darker path.”

I heard the example of Turkey brought up over and over again on the TV. Turkish President Recep Tayyip Erdogan has had his thumb on Turkish monetary policy and price inflation has reportedly hit 80 percent. In 2023, a local told me the rate was more like 160 percent. I wrote about Istanbul’s Grand Bazaar in 2011, “The Turkish monetary authorities have a history of debauching their currency so Turks store their wealth in gold and rugs. It’s no surprise there are 373 jewelers and 125 rug stores in the [Grand] bazaar. Souvenir shops are also prominent (217), as are shops selling leather goods (114).”

“Among worst-case scenarios for the economy — and favorable for gold — is that the dollar plunges as the Fed is compelled to cut rates despite rising inflation,” reports Bloomberg.

“The dollar will be the release valve for the policies that the administration wants to enact,” said Shaniel Ramjee, co-head of multi-asset in London at Pictet Asset Management. Gold is “protection against that weaker currency, or policies that are deliberately built to weaken the dollar,” said Ramjee.

Central bankers are shameless with their money creation. Ever the optimist, Murray Rothbard gave politicians more credit than they’re worth:

…depreciation is highly embarrassing to the government.… The existence of gold in the economy is a constant reminder of the poor quality of the government paper, and it always poses a threat to replace the paper as the country’s money. Even with the government giving all the backing of its prestige and its legal tender laws to its fiat paper, gold coins in the hands of the public will always be a permanent reproach and menace to the government’s power over the country’s money.

The fact is, “The safe-haven assets used to be US dollar assets, but they’re looking less and less of a safe haven now,” said Alexandre Carrier, portfolio manager at DNCA Invest Strategic Resources Funds. “As a default, gold looks like one of the last safe havens.” The Turks have known that for centuries.