Several months ago I got into a little debate in this column with a fellow who said you should never, ever, invest in gold. It's "a worthless rock that has a net negative return as an investment," he claimed.
Investment pundits often try to get attention by making extreme statements. I suppose I played right into this guy's hands by writing a column responding to his rants, but I felt I had to. Pundits need to realize that people read what they write and take it seriously, and some might even make investment decisions based on it. That's why as I write this column I try to be very careful to really mean what I say. I may be wrong sometimes -- who isn't? But at least I want to be serious about the serious business of investing.
So back to the "worthless rock," which has moved to new all-time highs. I have been totally serious all these years in this column in recommending that investors hold gold. And I still stand by it. Like everything else, gold will have its ups and downs. But I think I understand why gold has hit new highs while most investments languish. And I think I understand why it will continue.
I've said here many times that gold is sensitive to inflation. That's basically why it's at new record highs -- because inflation is starting to take hold in the economy after a very long absence.
But let me be clear. I'm not saying that inflation is going to get out of control. I'm not saying it will turn into hyperinflation -- or even that anyone ought to get terribly worried about it, at least in the near future.
On the contrary, right now inflation is a very good thing. We need it. We need more of it. We're getting it, and gold is telling us that.
After the credit collapse of 2008-2009, the world economy plunged into deflation. Deflation is an economic cancer that destroys asset values. When it takes root, the price of everything falls -- and although that may be good for things you buy like food, it's no good for things you own like houses or stock portfolios. It's not even really good for food because although you buy it and want prices to be low, someone else grows it, processes it, transports it, cooks it, and sells it and needs prices to be high.
When everyone expects prices to fall, they refuse to hold assets because they are expected to depreciate. They hold back on purchases because everything will be cheaper tomorrow that it is today.
And if you are in debt, then you are really dead in a deflation. The value of everything falls except the debt you have to repay.
So by comparison with deflation, inflation is a walk in the park. We're lucky to have gold telling us that a little inflation is coming. We don't want to go back to the world of 2008-2009, when deflation was dragging the whole world economy down.
This new inflation is exactly what Ben Bernanke and the Federal Reserve have been hoping for. It's what they've been frantically working to achieve with their zero interest rates, and trillions of dollars of quantitative easing. I know, you're used to thinking of the Fed as being all about fighting inflation. That's so 1990s! This is the new world, where the Fed is all about fighting deflation.
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