The Practical Economist

COMMENTARY - July 31, 2017

Let's See if You're Awake

We're not so precious as to believe that all of our Commentary pieces have equal relevance for every reader.  But we do hope that we recognize when there's a topic that is of special or wide importance.

This update is one of those.  It won't be coming down until mid-September.

Let's talk about...Gold.

You've been brainwashed by the financial press into thinking about Inflation when you think about Gold.

That's a mistake.  Inflation is actually beneficial in terms of keeping the real price of Gold steady.  That's because demand for Gold (i.e. a tangible substitute for a fiat currency) is strongest when prices are declining because the economy is contracting. 

There is no easy clear case for Gold at the moment.  The conditions don't appear to favor it strongly.  The Dollar is sort of holding up, after all.

And corporate earnings as a ratio of the money supply suggest that earnings are growing just enough to create just enough real wealth to keep from making the case that the currency is becoming badly diluted.

But consider:

1.  That ratio is satisfactory but not robust or growing strongly.

2.  Slowing inflation (most notably stemming from downward pressure on commodities) is putting upward pressure on the budget deficit.

3.  The budget deficit is now at 21.4%, the worst it's been since November 2013.

Our thesis: if you want to make the case that Gold should be viewed as a long-term bearish move, you have to make the case that inflationary pressure will remain stable or actually grow.

As you try to make that case, consider how moderate inflation has been in the face of month after month of strong employment growth.

Again, we are not saying that Gold is set for a big take-off in demand, but...we think that the long-term case for Gold as an increasing position in your portfolio is growing.

We are preparing a major white paper on what we view as the overriding themes in the U.S. economy for the next 30 years.  We're not going to give you too much advance in the way of clues as to what it will say (it's not actually done yet!) but, keep this in mind: as you look back at the last 70 years in the U.S., during how much of the time was the economy NOT fundamentally informed by (1) massive fiscal spending (2) tax cuts (spurring growth) and (3) recessions?

Exactly.

Now explain to us that the way forward is completely stable.