James Grant, editor of Grant’s Interest Rate Observer, is urging investors to put their money in gold because he fears that the world will lose faith in central banks, or as he terms it “monetary management.”
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“I’m very bullish on gold and I’m very bullish on gold mining shares,” Grant told Swiss business newspaper Finanz und Wirtschaft.
“That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. It does not pay dividends or earn income so keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in but, to me, gold is a very timely way to invest in monetary disorder,” he said.
However, the stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.
Grant urges investors: don’t be fooled. “The Fed is now hostage to Wall Street. If the stock market pulls back a few percent the Fed becomes frightened,” he explained.
“In a way I suppose, the Fed is justified in that belief because it is responsible to a great degree for the elevation of financial asset values. Real estate cap rates are very low, price-earnings-ratios of stocks are very high and interest rates are extremely low,” he said. “It has come to a point where the Fed is virtually a hostage of the financial markets. When they sputter, let alone fall, the Fed frets and steps in,” he said.
He seems to have little confidence in Fed Chairman Janet Yellen, or any interpretation of the central bank’s financial tea leaves. “She believes what most interventionist minded economists believe: They have very little faith in the institution of markets and they don’t believe that the price mechanism is anything special. They want to normalize rates and yet they can always find an excuse for not doing so,” he said.
“We have been hearing for years now that the next time, the next quarter, the next fiscal year they will act…[that] one of these days the Federal Funds Rate will go higher than 0.5%. I can’t see that happening,” he said.
He said for the average investors, options are limited. “Sovereign debt is my nomination for the number one overvalued market around the world. You are earning nothing or less than nothing for the privilege of lending your money to a government that has pledged to depreciate the currency that you’re investing in,” he said.
“The central banks of the world are striving to achieve a rate of inflation of 2% or more and you are lending certainly at much less than 2% and in many cases at less than nominal 0%. The experience of losing money is common in investing but where is the certitude of loss even before your check [cheque] clears?”
To be sure, gold is one of this year’s most talked about investment topics. Investors tend to flock to gold in times of uncertainty because it is seen as a safe haven that will hold its value.
- The World Gold Council says that gold demand hit record highs in the first half of this year. With prices near $1,350 an ounce. gold is up 25% this year.
- “Gold is a haven when there is great uncertainty in the world,” Fatima Khizou, an analyst at Morningstar, told the Financial Times and, until the global economy stabilizes, investors will continue to flock to the precious metal.
- “People are incredibly nervous. Gold has always correlated with investor’s nervousness. When they don’t have that confidence, it is time for gold and gold stocks,” Lewis Grant, senior portfolio manager at Hermes, the investment manager, told the FT.
Meanwhile, John LaForge, head of real-asset strategy at Wells Fargo, urges investors not to ignore platinum, which has soared 21% year-to-date. “The ideal investment positioning here is to go long platinum, short gold, or what we call a spread trade,” he told Business Insider. Investors who bet only on higher platinum prices could be burned because a drop in gold could drag platinum with it, LaForge said. Gold is likely to drop to $1,050, the low reached in December 2015, LaForge said.
“We believe that gold should be owned in a portfolio, but for long-term strategic buyers looking to accumulate, we believe that better entry points will be seen in the next few years,” LaForge wrote.
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