by Claudio Grass, Claudio Grass:
Over the last couple of years we witnessed quite an extraordinary ride in gold prices. An impressive ascent until the last quarter of 2020 was followed by a pullback that scared many speculators away, which in turn transformed into a period of strength and then came another ebb… And recently, once again, we saw the yellow metal shoot up, fueled by inflation fears and the situation in Ukraine. Given that the fundamentals remain unchanged and that the only way is up for gold, another short-lived consolidation is to be expected, before a much bigger leg up, and on and on it goes. For those focusing on the short-term price moves, trying to make a buck off a 2% fluctuation from today to tomorrow, I’m sure these patterns are fascinating. But for those of us who have a time horizon that stretches beyond the next couple of weeks, it is the big picture that matters.
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In this context, during the latest gold price rally, I got a lot of the same questions I always tend to get from clients, readers and friends, all revolving around the same point. Some of them failed to buy at lower price levels, others were thinking about stocking up given the uncertainty ahead and a few are first-time investors, whose attention was grabbed by the headlines… But all of them were considering to invest in physical gold now and they were wondering whether it is too late, whether the price is too high and whether entering the “race” now would be a poor strategic choice. Perhaps they should wait a little longer for a pullback? Perhaps, at these levels, gold is simply “too expensive?”
So far, my reply to these questions was always along the same lines. “Too expensive compared to what”?. Whatever asset class one wishes to use as a reference here, yields the same result. For example, fiat currencies are as worthless as they’ve ever been, the only difference now is that ordinary people are starting to catch on, even if it is unwittingly. For the first time we’re seeing inflation play a major role, even in “mainstream” outlooks and risk assessments. In terms of purchasing power, paper money has been on a nosedive trajectory compared to gold for decades already and now that trend has been decisively accelerated. If we keep going down this path, which to me seems impossible to escape at this point, the purchasing power of the dollar, the euro, and all their peers will be a tragic joke compared to physical gold and silver.
What if we compare gold to equities? Any reasonable investor would be hard pressed to find an asset class more overvalued and with prices more blatantly, artificially pumped to nonsensical levels. Unprofitable, unsustainable, debt-ridden zombie companies are commanding prices that cannot be rationally justified, not by their outlook, not by their past performance and certainly not by the state of their balance sheets.
And what about other “real assets”? Well, let’s look at real estate, that was traditionally considered another “wise” choice for conservative investors. As those who have invested in this class in the past will know well, that is no longer the case anymore. Apart from the prices that are in bubble territory in the greater part of this class, there are numerous other considerations that make real estate a lot less attractive than it used to be. For instance, the tax and property rights implications pose a serious threat, especially given the unpredictability of most jurisdictions and the state of desperation that most governments find themselves in these days.
Now, while these are the sort of arguments I would usually bring up in conversations about “how high is too high” when it comes to the gold price, the events of the last two years have made realize that there so much more to this question and led me to reconsider the way I answer these questions. It really does go a lot deeper than a comparison between gold and stocks, or considering the better “play” for one’s portfolio performance. The real counter-question now is “what is your peace of mind worth”?.
I’ve always outlined this deeper way of thinking about this issue, and I’ve always found many who agreed with me among the rational, responsible, long-term gold investors. However, until recently, most mainstream savers and investors would have found this approach “alarmist” and would have likely dismissed it as unrealistic. But now, after everything that we’ve seen since the onset of the covid crisis, I find it simply naive and dangerously short-sighted for physical precious metals investors to focus on a 5% fluctuation in the price and to totally ignored the real value of the thing they’re buying.
One could have been forgiven for thinking this way in 2019, especially those that thought or cared little about the risks of our current financial system. Nevertheless, at this point, after we’ve all had direct, first-hand experience of what happens, and how easily it happens, to anyone who has never planned ahead to secure at least some financial independence, there is absolutely no excuse. We saw millions of workers be deprived of their livelihoods, and of their fundamental right to earn it, we saw money itself be used as political weapon and we saw countless supposedly “free citizens” become essentially hostages in their own nations and even their homes. And all this happened seemingly in the blink an eye, offering no warning and leaving no time for anyone to make an alternative plan if one wasn’t already in place. So, in this context, let’s consider that question again: What is it worth to you, not be in this position?
And the real-life, practical reasons don’t stop there. As I wrote in a recent article on the Lessons from the “Freedom Convoy” in Canada, the State power-grab that happened during the pandemic didn’t stop with the decline of new covid cases. To the contrary, it set a precedent and it opened the door to even more overreach and abuse. Now, for the purposes of “protecting the public”, bank accounts can be frozen without any due process and private property can be summarily seized. And unfortunately, the dangers are bound to multiply. There are already signs that the conflict in Ukraine, and the fear-mongering that comes with it, can also be used to further embolden the State in its interference with private enterprise, private property and individual financial sovereignty.