In the world of trends, history repeats itself more than it rhymes. Things that were considered “in” decades ago, can reappear as cool decades later – from mom jeans to vinyl records and even Marxist ideology, the spotlight turns to the good, the bad and the almost forgotten.
Inflation is the latest trend to reappear.
Not your father’s inflation
But it’s not the kind and considerate inflation that’s been buzzing quietly in the background for years. It is heartbreaking, headline-grabbing inflation that dominates the news cycle and has many wondering: why are things so much more expensive today than they were yesterday? a year ago?
Because our “money” is not money.
As rising CPI figures continue to dominate the headlines (the most recent figures stand at 8.3% per year), the common refrain from central bankers is that there is no no need to panic. All of this was calculated and anticipated by Federal Reserve economists.
Just as GDP is a terrible measure of economic health, the CPI is a terrible measure of inflation. Not only has the basket of goods used to make the calculation changed many times, but the approach to the problem is not even wrong, as we like to say.
Price increases will affect different people in different ways. Either way, we can be certain of one thing, the federal government’s broken IOU, which we mistakenly call “money” today and the system built around it isn’t helping. In fact, it’s meant to hurt.
You are supposed lose value every year by holding dollars! It’s a feature, not a bug. Although the stated minimum may be 2% depending on their own mandate, there is no limit to its level.
Challenges Facing Investors
When the minimum reported loss on your dollar is 2% and it exceeds 7.5%, how do you come up with an investment strategy to retire on one day?
Since no certificate of deposit (CD) will truly outpace inflation, many have turned to the stock market, i.e. TINA – There is no alternative. Sure, you could aim for a portfolio that earns 4% every year, but it’s not as simple as it sounds. The stock market is overvalued by many different measures. And as we say, rising asset prices are no substitute for earning a return (despite what almost everyone will tell you).
There is no sign that the Fed is ready to undo the damage it has already done. The total debt burden continues to grow. If the past is any indication of the future, one can only conclude that there will be more debt to come. Rising debt puts downward pressure on yields (bond yields are the inverse of bond prices), adds default contagion risk, and ultimately increases the risk of owning dollars because you are the creditor.
These are just a few of the known risks to consider. Then there are the “unknown unknowns,” black swan-like events like COVID that cannot be predicted and are extraordinarily difficult to cover. Generating a proper return in this inflation-beating market is no easy task, so it’s time to retire TINA (the acronym for the idea that there is no alternative to stocks) and to put GITA (Gold Interest is The Alternative) in charge.
It might not be the catchiest of acronyms, but earning interest on gold is an alternative worth considering. Gold and silver have a strong track record of resisting dollar gaps. Since 1970, gold has returned around 8% per year, measured in dollars. Earning interest on gold means your ounces go up regardless of the price of the shiny metal. A steadily increasing amount of gold and silver and a history of rising prices can be a strong combination.
Erik Oswald is relationship manager at Monetary Metals & Co. (www.monetary-metals.com).
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