In a recent Bloomberg op-ed, author Jared Dillian celebrates gold on the basis of its demonstrated potential to serve as a store of value. This brings to the forefront a benefit not usually prioritized by asset buyers. Assets typically are prized (or not) on the basis of how likely they are to serve as a source of capital appreciation, as well as their potential to generate income. But as rumblings grow louder over the prospect of a considerably weaker future economic output, those looking to retirement may be particularly well-served by also evaluating portfolio holdings in terms of capacity to act as stores of value.
Growing Economic Weakness Highlights Key Benefit of Gold
A worsening economic climate suggests stores of value may have an improved chance of thriving, and if you look beneath the surface it does indeed appear as though the U.S. economic climate is deteriorating.
A great deal of talk lately has centered on how the U.S. economy is much weaker than popular and oft-touted metrics suggest it is. Most significantly, the “official” unemployment rate is now well below 4% and has hovered around the 4% mark for two years now. However, many see that figure as deceiving, and with good reason.
For example, the number does not take into account those who are underemployed, such as people working at jobs beneath their abilities, training and/or education. It also does not include the individuals who simply have given up looking for work in the short term – they are known officially as “discouraged” workers. There is an official government unemployment rate that accounts for those folks – the U6 unemployment rate – but it is not commonly referenced by the government (go figure). That rate stands presently at 7.2%, double the current “official” unemployment rate. Moreover, John Williams, a watchdog of “official” economic statistics released by the feds, declares at his website Shadow Government Statistics (SGS) that if the long-term discouraged American worker was also added into the unemployment rate, it would stand at a truly depressing 21%.
The ShadowStats Unemployment Rate is illustrated below along with the Bureau of Labor Statistics’ U3 and U6 rates. The ShadowStats Rate includes ShadowStats’ estimate for the number of long-term discouraged workers. Note that this demographic was made unofficial by the government in 1994. For purposes of calculating the SGS Alternate Unemployment Rate, ShadowStats’ estimate of long-term discouraged workers is added to the Bureau of Labor Statistics’ estimate of U6 unemployment, which includes short-term discouraged workers (see blue line in chart).
(Chart Courtesy of ShadowStats.com)
Analysis by asset manager Jeffrey Gundlach also supports the idea that we’re living in an extremely weak U.S. economy. He says the economy actually would be shrinking if not for the trillions in debt generated at both government and consumer levels.
Revealingly, central banks – the very overlords of the fiat currency system that is the antithesis of the concept of a store of value – have been acquiring physical gold at a record pace. Although some central banks are loading up on gold in part to reduce their vulnerability to U.S. hegemonic power exercised through the dollar, the overriding reason for the buying spree is the world’s worry about the dollar’s strength.
And strength of the dollar is an issue. When gold recently broke through a longstanding price resistance level of $1,350 an ounce and soared to more than $1,400 per ounce where it remains today, that jump was sparked by the Federal Reserve’s recent announcement that already-low interest rates may be heading back down. A downward shift in interest rates typically weakens the dollar. And, when the dollar weakens, the world’s most popular store of value – gold – tends to strengthen. The recent announcement and increase in gold prices provided a textbook example in real time of how an asset that principally serves as a store of value can benefit portfolios that include it.
“Perception as Reality” Can Increase the Benefit of Owning Stores of Value
It’s important to note that popular stores of value such as gold have the potential to benefit portfolios not just because of actual changes in the economic environment that are favorable to the asset but even merely due to fear of such changes.
This means the perception of an asset as a store of value is as important as the reality. In other words, an important, underlying reason gold can stabilize portfolios against volatile risk assets is because the public does view it as a store of value.
Bloomberg’s Dillian alludes to gold’s perception-of-value benefit in his article, noting that “gold can move on fear. It can move on fear of deficits and it can move on fear of MMT (Modern Monetary Theory) – even if those fears are never realized.”
So, even if an acute bout of inflation from monetary policy doesn’t arise, or if drastic social engineering of the economy (as exemplified by MMT) doesn’t materialize, the mere threat of these eventualities typically will be enough to prompt savers to flock to gold.
Gold’s Store-of-Value Quality Could Be Especially Important in Coming Years
Consumers, financial experts and the world in general increasingly fear energetic financial markets could be constrained in the years to come. This is because many expect a reversion to the mean following years of drastic measures undertaken by the Fed. In other words, risk assets that have gained significant value on the back of ultra-loose monetary policy are expected to come back to earth if policy tightens.
And if the Fed decides the condition of the economy warrants implementation of even more drastic loose-policy measures going forward, that still bodes well for gold because of the prospect of a greatly weakened dollar. In one case risk assets will be the principal casualty, and in the other case the dollar will suffer. In both cases, based on the Midas metal’s track record, there’s a potential golden opportunity for it to strengthen.
Gold’s record as a store of value is unique among well-known assets. And, as we can see, in the years to come store-of-value assets have the potential to grow substantially greater in importance. To learn more about the unique portfolio-protection properties of gold, call Augusta Precious Metals at 800-700-1008 and speak with one of our knowledgeable, friendly gold and silver professionals. Additionally, if you envision a role for a reliable store-of-value asset in your tax-advantaged retirement portfolio, ask the Augusta representative you speak with for information about how to purchase gold – and silver – for an IRA.