Fight Stagflation: Buy Gold
Posted By | April 18, 2016
The Wall Street Journal reported this week about the possible reappearance of a most unwelcome guest, stagflation. That is the combination of a stagnant economy and rising inflation, the worst of both worlds. The WSJ article also offers some useful advice for those worried about stagflation: Buy “Gold is the ultimate in inflation protection.” I couldn’t have said it better myself.
For many of you seasoned veterans of the economic wars, stagflation might seem like a vanquished enemy rising from the dead. It last showed its ugly head during the Nixon administration (I know you remember Nixon). Now, it seems that some investors are seeing the ghost of stagflation past reflected in the latest economic readings. The inflation portion of this witches’ brew can be seen in rising expectations for inflation. In February, the consensus annual inflation rate for the next decade was 1.2 percent, but now it’s up to 1.7 percent. It hasn’t been that high since last summer, when China began falling apart.
Economic growth expectations
Show up in the difference between the yields on 10-year Treasury notes and those on TIPs, or Treasury Inflation-Protection Securities. TIPs pay paltry interest, just 0.27 percent above inflation, but the interest they pay out varies with the inflation rate. Now, when inflation expectations started to rise a month ago, the yield on Treasury notes rose, meaning their prices went down. But here’s the kicker – the prices of TIPS continued to rise, meaning that investors don’t see much in the way of economic growth right now. If they did, they’d invest their money in higher-yielding, riskier assets, like stocks, instead of bidding up the prices of TIPS.
So, in a nutshell, you’ve got the market for Treasury bonds suggesting higher inflation and weak growth. That’s stagflation.
Is it any wonder, then, that gold is in a bull market? You see, gold is one of the very few assets that holds its value during times of inflation. Remember, gold can never be devalued! You can’t say the same for stocks, bonds and currency, which are all paper-based “assets.”
You know what happens to money when inflation strikes. Suddenly your $20 bill buys only $19.75 worth of goods and services. Then its $19.50, $19, who know where it will stop. In 1929 Germany, you had to spend a billion deutschmarks to get a loaf of bread. But it only took a miniscule amount of gold to buy that same loaf. I think you get the picture.
Now, the last round of stagflation in the U.S. ended in 1980, when inflation topped out at 15 percent. No one knows what will happen this time, but I advise you not to sit on the sidelines hoping for the best. No, ladies and gentlemen, the time to prepare for the future is now. In my book, that means opening a Gold IRA at August Precious Metals. We sell gold bullion coins at absolutely unbeatable prices, and contributions to your Augusta Gold IRA are tax deductible. Contact us today!
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