Investors have recently been piling into cash. According to a report by BofA Global Research, cash funds last week saw their largest inflows since the pandemic panic of early 2020.
Back then, cash instruments offered little to no yield and, they did serve as a temporary haven from market volatility. But as is typically the case, investors rushed into an asset class at exactly the wrong time.
Investors who are sitting in U.S. dollars now risk missing out on the possible next leg of a precious metals bull market.
In theory, they are being rewarded this time with yields of up to 5% on short-term Treasury bills.
Returns on cash instruments haven’t been this high in over a decade.
Even some Wall Street analysts who normally pitch stocks are touting cash as a superior risk/reward proposition. T-bills, certificates of deposit, and money market funds now return more than the dividend yields on blue-chip stocks without the accompanying volatility of equity markets.
Higher yields are also driving some investors out of precious metals related assets. Gold funds recently suffered outflows of $900 million.
Gold detractors argue that since bullion yields nothing, it is less appealing than cash instruments which offer relatively attractive nominal yields.
They fail to grasp two important points, however.
First, a nominal yield of 5% in a high-inflation environment isn’t necessarily more attractive than a nominal yield of 0% in a low-inflation environment.
If inflation, properly calculated, were to average 10% this year, then a 5% nominal return would translate into a 5% real loss!
Second, gold and silver markets can produce spectacular returns during periods of relatively high, and rising, nominal interest rates.
That’s exactly what happened during the late 1970s. It was only when Federal Reserve chairman Paul Volcker jacked up interest rates to punishing double-digit levels that rates finally got ahead of inflation and the great precious metals bull run ended.
Current Fed chairman Jerome Powell hasn’t yet pulled off a similar feat. Despite his claims of “disinflation” taking hold, actual inflation gauges continue to come in hotter than expected while the Fed funds rate continues to lag behind.
That’s called a “negative real return” – and gold loves such conditions.
Meanwhile, bonds and cash instruments are virtually guaranteed to lose real value over time.
The world’s biggest debtor (the U.S. government) is not planning on paying positive real rates to its creditors (bondholders).
Since it must continue borrowing just to pay interest on previously issued debt, the only way the government can keep its Ponzi scheme going is by constantly devaluing what it owes. That means making sure inflation stays elevated above nominal rates.
Of course, there will be times when sitting in cash saves investors from experiencing downside volatility in equity or hard asset markets. But over the long term, holding cash is a losing proposition.
As history shows, over the long term, gold retains its purchasing power better than fiat cash or debt in any form.