The fourth quarter is starting with a bang for precious metals markets. Silver in particular posted a big breakout move – surging to a four-month high above $21/oz.
Bulls see the potential for a big metals rally to finish out the year.
However, 2022 has so far seen gold and silver markets struggle to gain sustained traction.
Longtime precious metals naysayers such as personal finance guru Dave Ramsey are pointing to gold and silver weakness throughout most of the year as evidence that they don’t protect against inflation. Are the anti-gold bugs right?
It is true that gold and silver prices retreated as the Federal Reserve launched into its most aggressive rate hiking campaign in decades – propelling the Federal Reserve note “dollar” to surge on foreign exchange markets.
It’s also true that 2022 has been a historically bad year for most asset classes. It’s been disastrous in particular for a diversified stock and bond portfolio of the sort Dave Ramsey and other financial advisors conventionally recommend.
According to CNBC, “From the start of 2022 through September 28, a 60/40 portfolio invested in line with benchmark U.S. stock and bond indexes shed 20%. Only two calendar years — both during the Great Depression — have been worse.”
Gold, meanwhile, has held up relatively well. It has fallen around 6% in U.S. dollar terms this year while rising against virtually all of the world’s other major currencies.
U.S. dollar “strength” is temporary. Inflation is here to stay.
The Fed will have to back off on rate hikes at some point, likely soon. Then the forces of inflation and economic weakness pointing to recession could combine with a declining dollar to drive precious metals prices massively higher.
Few other asset classes are even capable of generating strong returns in an environment of stagflation.
Yet according to Dave Ramsey, in a recently posted rehash of his boilerplate objections to gold, “Investing in Precious Metals Is a Bad Idea.”
Ramsey claims gold and silver fail to protect against inflation and would be useless during a financial crisis: “The prices of gold and silver are so unstable (and have been over time) that the only use for them in an economic crisis would be to hope someone would take your silver coins or watch in exchange for a pack of toilet paper or a can of gas.”
The case for owning precious metals doesn’t rest on them being used as direct barter instruments. The global market for gold and silver is deep and liquid. Bullion can always be sold for cash.
But yes, gold and silver coins can also be used directly as money in exchange for other goods or services. Bullion holders sleep well at night knowing that if the banking and brokerage systems were to freeze up, they wouldn’t lose access to their tangible wealth.
Gold historically has retained its purchasing power better than any paper currency ever printed. Yet Ramsey claims, “It has a crummy track record as an investment.”
Ramsey has a crummy grasp of recent history.
From 2000-2010, gold gained a cumulative 280%. But for the stock market, it was a lost decade.
The S&P 500 actually fell 24% over that same period.
Incredibly, Ramsey asserts, “Since the dollar isn’t backed by gold anymore, investing in this precious metal won’t help you if inflation hits.”
The whole point of gold as investment thesis is that it serves as a hedge against an unbacked dollar! It’s as if Ramsey suffered from some sort of weird mental glitch when he made that nonsensical statement.
During the decade of the 1970s, as paper assets got clobbered by inflation, gold delivered average annual returns of 30.7%. The S&P 500 barely eked out nominal gains of 1.6% per year – which were far too puny to keep pace with an inflation rate that surged into the double digits by the end of the decade.
Obviously, gold and silver price performance can be disappointing during any given calendar year. Metals investors should have a long-term time horizon and be prepared to endure inevitable downswings.
Gold and silver serve a valuable niche within an overall investment portfolio. Financial advisors who advocate paper assets (stocks and bonds) exclusively have no real strategy for surviving stagflation.
At the core of Ramsey’s teachings over the years has been his aversion to debt. He advises people to literally cut up their credit cards.
He recommends that homeowners pay off their mortgage as soon as they are able.
But he didn’t change his advice even the slightest when rates were at historic lows. Those who had locked in or refinanced at a low, fixed rate obtained a powerful inflation-fighting tool. As the U.S. dollar depreciates, they will see the real value of what they owe actually go down.
Ramsey’s recommended mutual funds won’t necessarily regain their recently lost real value as inflation persists.
And while nothing is certain about the future direction of any asset market, precious metals have the potential to greatly outperform financial assets during a 1970s-style economic cycle that now shows signs of being underway.