I love James Bond flicks, preferably from the Sean Connery era. "Goldfinger" is one of my favorites. I am often reminded by the classic scene in which a captive James Bond is seconds away from being charred by a laser.
James Bond: "Do you expect me to talk?"
Goldfinger: "No, Mr. Bond -- I expect you to die!"
Quintessential 007: Ridiculous stunts and jams, sports cars, beautiful women and a dastardly, almost clownish villain -- in this case, one whose plan was to poison the U.S. gold supply at Fort Knox to create global financial chaos. His endgame? Simply to drive up the value of his own gold holdings.
Frankly, it sounds like walking around the block to get across the street. But hey, it's a James Bond movie.
Since the financial crisis of 2008, the global villain that seemed destined to wreak havoc wasn't a fat guy who liked to cheat at golf. The perceived villain was hard-core, runaway, Weimar/Zimbabwe-style global hyperinflation caused by central bank quantitative easing programs.
However, that scary train hasn't arrived at the station yet in the U.S. based on the continued tepid economic and employment growth. There are modest signs of recovery. The country is doing better than it was four years ago, but things aren't exactly galloping.
The End Of The World Has Been Postponed
When it comes to investing, fear is often a primary driver. Most individual gold investors are driven by fear. Most institutional gold investors use it purely as exposure to an asset class. But the man on the street buying shares of GLD or South African Krugerrands is frightened of something: runaway inflation, currency devaluation, government overreach and societal collapse. It's always good to think about survival, but it's a terrible investing theme.
Domestically, things are improving. The unemployment rate is shrinking slowly. It currently sits at 7.6%, down from 10% at the deepest part of the crisis recession. Is it great? No. But it's a considerable improvement. One positive consequence: The slower that businesses are to hire new workers, the slower the money will flow. Inflation will remain tame.
But what about the dollar being devalued? Again, the dollar is stronger than the panicky masses think. The U.S. Dollar Index (DXY), which measures the strength of the dollar versus other benchmark currencies, is up nearly 14% since 2011, despite the Federal Reserve's QE.
Goldbugs believe the shiny yellow metal serves as a proxy currency to replace weak fiat money. If market forces dictate the rise of gold prices as the dollar falls, then the inverse -- gold prices falling as the dollar rises -- is inevitable.
The Fed has also hinted that it may begin slowing down or "tapering" its bond purchases. This indicates an eventual end to QE and the debased currency. If you think gold prices have a downward bias now, wait till tapering really begins!
|Physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.).|
Think about the classic goldbug argument: Invest in gold as an inflation hedge. I just can't see the logic in this outside of protecting a portion of your wealth. The simple explanation of inflation is that it takes more money to buy less.
In an inflationary environment, the value of your gold may be going up. Good for you. But don't you need more money to buy things? If that's the case, shouldn't you own assets that give you better cash flow?
Since physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.), assets with growing cash flow make more sense, especially those tied to hard assets.
Energy pipeline master limited partnerships (MLPs) have always been one of my favorite tools to accomplish this. Oil mover Buckeye Partners (NYSE: BPL) is a good name to use, as is Boardwalk Pipeline Partners (NYSE: BWP) in the natural gas space.
Risks to consider: Again, I could be completely wrong. Any major events in the Persian Gulf, Europe or the Korean Peninsula could send gold soaring on the fear trade. Global economies could erupt into chaos, and QE could go on forever, which means that we'd eventually use paper currency as bathroom tissue. It's always a possibility, but realistically, the chances are probably slim. U.S. GDP growth, while not stellar, has improved dramatically, surging from negative 8.9% during the 2009 recession to a positive 1.8% currently.
Action to take --> As the U.S. economy continues to improve steadily, the Federal Reserve prepares to dial back its QE policy, and investors continue to rotate into stocks, the price of gold is poised to fall further. Look for another down leg in the range of $1,000 to $900 an ounce. That's another 20% to 25% loss.
In my previous article, I compared buying GLD to buying Apple (Nasdaq: AAPL) near its topped-out price of more than $700 a share. But I've changed my opinion -- Apple may be worth a look. Shares are off nearly 40% from that bloated price. Thanks to that correction, the stock's dividend yield now sits at an attractive 2.9%. That's nearly 300% more than what gold is paying you right now -- or ever -- for that much.