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Black
Swans, Yellow Gold
by Michael J. Kosares
(The following is
the second of a five-part series on how gold performs during periods of
deflation, chronic disinflation, runaway stagflation and hyperinflation. The
second installment examines gold’s safe-haven role during a
disinflationary breakdown like the one in 2008-2009.)
“The inability
to predict outliers implies the inability to predict the course of history. . .But we act as though we are able to predict
historical events, or, even worse, as if we are able to change the course of
history. We produce thirty-year projections of social security deficits and
oil prices without realizing that we cannot even predict these for next
summer — our cumulative prediction errors for political and economic
events are so monstrous that every time I look at the empirical record I have
to pinch myself to verify that I am not dreaming. What is surprising is not
the magnitude of our forecast errors, but our absence of awareness of
it.”
- Nicholas Taleb, The Black Swan — The Impact of the Highly
Improbable, 2010
“Having been
mugged too often by reality, forecasters now express less confidence about
our abilities to look beyond the immediate horizon. We will forever need to
reach beyond our equations to apply economic judgment. Forecasters may never
approach the fantasy success of the Oracle of Delphi or Nostradamus, but we
can surely improve on the discouraging performance of the past.”
- Alan Greenspan,
The Map and the Territory, 2013
Introduction
This short study
examines gold’s performance under the four most commonly predicted
worst-case economic scenarios — a 1930s-style deflation, chronic
Japanese-style disinflation, a 1970s-style runaway stagflation, and a
Weimar-style hyperinflation. “That men do not learn very much from the
lessons of history,” Aldous Huxley once wrote, “is the most
important of all the lessons of history.” Though I agree with
Huxley’s assessment when applied to contemporary policymakers and
central bankers, I do not agree with it when applied to their counterparts in
the private sector, i.e., the individual investors. As justification, I offer
the ongoing (and long-term) success of the USAGOLD website as well as the
soaring statistics of late on private gold ownership both here and abroad,
most of which has been accumulated for safe-haven purposes. Individually, we
can and do learn the lessons of history even if we do not always do so
collectively.
Black Swans, Yellow
Gold is dedicated to those who believe, like Nicholas Taleb,
that it is just as important to prepare for what we cannot foresee as what we can. Some might put their
money on the latest Oracle of Delphi or the contemporary reincarnation of
Nostradamus — or even an all-seeing eye plug-in that can be downloaded
from the internet — but in the end, such notions are the dreams of
government planners and retired central bankers. For the rest of us, a solid
hedge in gold coins, as you are about to read, is the more sensible and
reliable alternative — a wealth haven for all seasons.
We invite you to
return to these pages periodically for the third installment in this series
which we plan to publish next week.
Gold
as a disinflation hedge (United States, 2008)
JUST AS THE 1970s
REINFORCED GOLD’S EFFICIENCY as a stagflation (combination of economic
stagnation and inflation) hedge in the modern era, the 2000′s decade
solidly established gold’s credentials as a disinflation hedge.
Disinflation is defined as a decrease in the inflation rate over time (or a
constantly low inflation rate), and should not be confused with deflation,
which is an actual drop in the price level. Disinflations, as pointed out
above, are close cousins to deflations and can evolve to that if the central
bank fails, for whatever reasons, in its stimulus program. Central banks
today are activist by design. To think that a modern central bank would sit
back during a disinflation and let the chips fall where they may is to
misunderstand its role. It will attempt to stimulate the economy by one means
or another. The only question is whether or not it will succeed.
Up until the
“double oughts,” the manual on gold
read that it performed well under inflationary and deflationary
circumstances, but not much else. However, as the decade of asset bubbles,
financial institution failures, and global systemic and sovereign debt risk progressed,
gold marched to higher ground one year after another. As events unfolded, it
became increasingly clear that the metal was capable of delivering the goods
under disinflationary circumstances as well. The fact of the matter is that,
during the 2000s even as the inflation rate hovered in the low single digits,
gold managed to rise from just under $300 per ounce in the early 2000s to
just over $1900 per ounce by 2011 — a gain of over 600%. Since then,
gold has taken a breather. As this essay is written, it is trading in the
$1250 per ounce range — still up over 400% in the new century.
In the aftermath of
the 2008-2009 financial crisis something else
happened to the yellow metal: It firmly re-established itself with private
investors and nation-states as perhaps the ultimate asset of last resort. As
the economy flirted with a tumble into the deflationary abyss in recent
years, it encouraged the kind of behavior among investors that one might have
expected in the early days of a full deflationary breakdown with all the
elements of a financial panic. Stocks tumbled. Banks teetered. Unemployment
rose. Mortgages went into foreclosure. Nation-states defaulted on their
debts. Disinflation globally became chronic and debilitating.
 
As it became evident
that the economic and financial malaise could become a permanent fixture (the
new normal), gold came under accumulation globally. In 2009, U.S. Gold Eagle
sales, a bellwether for public interest in the metal, broke all records by a
wide margin, and the pace of accumulation has remained at high levels ever
since. The world’s central banks, historically at odds with each other
with respect to currency policies, have teamed up to deliver ever larger
doses of monetary stimulus that goes far beyond ordinary tinkering with
interest rates. Money printing has become a global undertaking — a
phenomenon the consequences of which are yet to be determined.
Meanwhile, the
disinflationary crisis that began in 2008-2009 is still with us and, through
it all, gold demand has gone undeterred. Although many thought the price
correction would dampen interest, the opposite has happened: It encouraged a
new wave of investment interest particularly in the Far East where low prices
were greeted with a wave of public demand. In 2013, China reportedly imported
nearly the equivalent of the world’s annual gold mine ouput — almost 2700 tonnes
— and other emerging and developed nation-states alike have experienced
their own versions of a new gold rush to own.
All in all, as the
two graphs immediately above amply demonstrate, the 21st century ushered in a
new era for gold, one in which it filled a hole in its resume. Now gold has
come to be viewed as an effective hedge against one of contemporary
economies’ most nettlesome problems — chronic disinflation and the
systemic financial risks it periodically imposes.
If you are looking for a gold-based analysis of the financial markets
and economy, we invite you to subscribe to our FREE
newsletter – USAGOLD’s
Review & Outlook, edited by Michael J. Kosares, the author of the preceding post, the founder of
USAGOLD and the author of “The ABCs of Gold Investing: How To Protect
And Build Your Wealth With Gold.” You can opt out any time and we
won’t deluge you with junk e-mails.
Part
One — Gold as a deflation hedge
(relinked for those who may have missed the first installment in this series)
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