It's an option of diversification.
Brains, managing funds are a better inflation hedge...
+------------------------------------------------------------------------------+
Gold Isn't the Best Protection Against Inflation: Matthew Lynn
2009-12-08 00:01:00.9 GMT
Commentary by Matthew Lynn
Dec. 8 (Bloomberg) -- Economic chaos? The dollar crumbling?
Central banks printing money like crazy? Probably the only real
surprise about the surge in gold prices over the last few months
is that it took so long to arrive.
Last week gold touched an all-time high of $1,227.50. Back
in September it was still less than $1,000. Chalk that up as a
victory for the gold bugs.
This week, the price is heading down, dropping below
$1,200. Chalk that up as a victory for the gold skeptics, who
regularly point out that the metal's value is just a sentimental
memory from a long-buried era.
In reality, while investors are right to be nervous about
inflation, maybe they are catching on that it's wrong to see
gold as the best hedge against a general rise in prices. There
are plenty of alternatives: equities, property, oil, luxuries or
private-equity funds should prove just as effective a way of
shielding yourself.
It isn't hard to figure out why investors had been getting
interested in gold again. Central banks are pumping freshly
minted money into the system. A few hundred years of economic
history says that eventually this will lead to inflation. It
might be next year, or the year after. It doesn't make much
difference -- it will arrive sooner or later, and you'll need to
get your portfolio in shape before it does.
Alloyed Record
But gold? Whether it's a hedge against inflation depends on
where you want to start drawing the graph. Back in 2002, gold
was less than $300. If you bought it then, you'd certainly have
protected yourself against rising prices -- and made a fat
profit as well. The 1990s were a different story. Gold started
that decade at around $400, and ended it below $300. Not so
great. As for the 1980s, forget it: gold lost almost half its
value during that decade.
In reality, gold has a mixed record. Nor should you be
surprised about that. A few industrial uses, and jewelry, aside,
gold is valuable only insofar as other investors think it is
valuable. By itself it isn't necessarily worth anything. Nor
does it generate interest or dividends. If the price doesn't
rise, you don't get anything.
There isn't much chance, either, of the world's central
banks making their currencies convertible into gold once again.
They would bankrupt their governments in the process. It may
secure itself a greater role as a reserve asset. But the gold
standard isn't about to be re-imposed.
In truth, while gold may have a role in protecting against
inflation, there are plenty of alternatives. Here are five you
should be thinking about -- particularly when you bear in mind
that gold is already close to an all-time high.
Real-Estate Rebound
One, property. The price of real estate won't always move
exactly in line with inflation. And you might want to steer
clear of the markets where there has yet to be much of a retreat
from the exuberant prices of 2006 and 2007. Even so, if there is
more money chasing a static amount of land and buildings, prices
are going to rise.
Two, oil. They used to call it black gold and maybe they
should again. It has already stopped being just stuff we put in
our cars, and use to heat houses, and become an investment asset
in itself. How else can we explain the fact that oil has ticked
up past $70 a barrel even while we're living through the worst
global recession since World War II? Oil is already, in effect,
an alternative to gold. The one difference is that you can put
it in your car and drive somewhere -- making it far more useful
than stuff good for little more than dental fillings and
trinkets to wear around your neck.
Stock Picking
Three, equities. Moderate, persistent inflation in the 3
percent range is good for the kind of big, blue-chip companies
that dominate the major global stock markets. They can edge up
prices along with everyone else. And they can usually get away
with increasing wages just a bit less than inflation, so cutting
labor costs as well -- particularly as unions are far less
powerful than they used to be. In those circumstances, the
shareholders should do fine -- and their equities will more than
keep up with rising prices.
Four, luxury goods and collectibles. Once inflation takes
off, it is only real assets that will hold their value --
everything else is just paper, and that will be of dwindling
use. Assets don't get much more real than historic art, valuable
antiques, vintage automobiles or fine wines. They should start
to soar in price as the mega-rich realize they are among the few
ways to protect wealth. And, heck, if you get it wrong, you can
always hang them on the wall, or drink them.
Five, private-equity funds. This one might not be obvious.
But a leveraged buyout firm buys well-established companies, in
basic industries, and then loads them up with lots of debt,
while hanging on to a little bit of equity. Inflation will
effectively wipe out all that debt. The result? The equity that
is left over will be worth far more.
Rate Squeeze
Of course, none of these will necessarily work in the long-
term. The only real way to control inflation once it gets
started is to raise interest rates high enough to create a deep
recession, and so choke off rising prices. That's what central
bankers did in the late 1970s and early 1980s, and may do again
sometime around 2015 or 2020. Once that happens, you'll need to
think again -- you might not want to be in property or equities.
That, however, is some way off. As we move into the early
stages of an inflationary era, those five assets should do at
least as well as gold, if not better.
(Matthew Lynn is a Bloomberg News columnist. The opinions
expressed are his own.)
Click on "Send Comment" in the sidebar display to send a
letter to the editor.
For Related News and Information:
To read more columns by Matthew Lynn: NI LYNN <GO>
More commentaries: OPED <GO>
For top commodities news: CTOP <GO>
For news on gold: NI GLD <GO>
--Editors: James Greiff, Laurence Arnold.
To contact the writer of this column:
Matthew Lynn in London at +44-20-330-7171 or
matthewlynn@bloomberg.net
To contact the editor responsible for this column:
James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net
+------------------------------------------------------------------------------+
Gold Isn't the Best Protection Against Inflation: Matthew Lynn
2009-12-08 00:01:00.9 GMT
Commentary by Matthew Lynn
Dec. 8 (Bloomberg) -- Economic chaos? The dollar crumbling?
Central banks printing money like crazy? Probably the only real
surprise about the surge in gold prices over the last few months
is that it took so long to arrive.
Last week gold touched an all-time high of $1,227.50. Back
in September it was still less than $1,000. Chalk that up as a
victory for the gold bugs.
This week, the price is heading down, dropping below
$1,200. Chalk that up as a victory for the gold skeptics, who
regularly point out that the metal's value is just a sentimental
memory from a long-buried era.
In reality, while investors are right to be nervous about
inflation, maybe they are catching on that it's wrong to see
gold as the best hedge against a general rise in prices. There
are plenty of alternatives: equities, property, oil, luxuries or
private-equity funds should prove just as effective a way of
shielding yourself.
It isn't hard to figure out why investors had been getting
interested in gold again. Central banks are pumping freshly
minted money into the system. A few hundred years of economic
history says that eventually this will lead to inflation. It
might be next year, or the year after. It doesn't make much
difference -- it will arrive sooner or later, and you'll need to
get your portfolio in shape before it does.
Alloyed Record
But gold? Whether it's a hedge against inflation depends on
where you want to start drawing the graph. Back in 2002, gold
was less than $300. If you bought it then, you'd certainly have
protected yourself against rising prices -- and made a fat
profit as well. The 1990s were a different story. Gold started
that decade at around $400, and ended it below $300. Not so
great. As for the 1980s, forget it: gold lost almost half its
value during that decade.
In reality, gold has a mixed record. Nor should you be
surprised about that. A few industrial uses, and jewelry, aside,
gold is valuable only insofar as other investors think it is
valuable. By itself it isn't necessarily worth anything. Nor
does it generate interest or dividends. If the price doesn't
rise, you don't get anything.
There isn't much chance, either, of the world's central
banks making their currencies convertible into gold once again.
They would bankrupt their governments in the process. It may
secure itself a greater role as a reserve asset. But the gold
standard isn't about to be re-imposed.
In truth, while gold may have a role in protecting against
inflation, there are plenty of alternatives. Here are five you
should be thinking about -- particularly when you bear in mind
that gold is already close to an all-time high.
Real-Estate Rebound
One, property. The price of real estate won't always move
exactly in line with inflation. And you might want to steer
clear of the markets where there has yet to be much of a retreat
from the exuberant prices of 2006 and 2007. Even so, if there is
more money chasing a static amount of land and buildings, prices
are going to rise.
Two, oil. They used to call it black gold and maybe they
should again. It has already stopped being just stuff we put in
our cars, and use to heat houses, and become an investment asset
in itself. How else can we explain the fact that oil has ticked
up past $70 a barrel even while we're living through the worst
global recession since World War II? Oil is already, in effect,
an alternative to gold. The one difference is that you can put
it in your car and drive somewhere -- making it far more useful
than stuff good for little more than dental fillings and
trinkets to wear around your neck.
Stock Picking
Three, equities. Moderate, persistent inflation in the 3
percent range is good for the kind of big, blue-chip companies
that dominate the major global stock markets. They can edge up
prices along with everyone else. And they can usually get away
with increasing wages just a bit less than inflation, so cutting
labor costs as well -- particularly as unions are far less
powerful than they used to be. In those circumstances, the
shareholders should do fine -- and their equities will more than
keep up with rising prices.
Four, luxury goods and collectibles. Once inflation takes
off, it is only real assets that will hold their value --
everything else is just paper, and that will be of dwindling
use. Assets don't get much more real than historic art, valuable
antiques, vintage automobiles or fine wines. They should start
to soar in price as the mega-rich realize they are among the few
ways to protect wealth. And, heck, if you get it wrong, you can
always hang them on the wall, or drink them.
Five, private-equity funds. This one might not be obvious.
But a leveraged buyout firm buys well-established companies, in
basic industries, and then loads them up with lots of debt,
while hanging on to a little bit of equity. Inflation will
effectively wipe out all that debt. The result? The equity that
is left over will be worth far more.
Rate Squeeze
Of course, none of these will necessarily work in the long-
term. The only real way to control inflation once it gets
started is to raise interest rates high enough to create a deep
recession, and so choke off rising prices. That's what central
bankers did in the late 1970s and early 1980s, and may do again
sometime around 2015 or 2020. Once that happens, you'll need to
think again -- you might not want to be in property or equities.
That, however, is some way off. As we move into the early
stages of an inflationary era, those five assets should do at
least as well as gold, if not better.
(Matthew Lynn is a Bloomberg News columnist. The opinions
expressed are his own.)
Click on "Send Comment" in the sidebar display to send a
letter to the editor.
For Related News and Information:
To read more columns by Matthew Lynn: NI LYNN <GO>
More commentaries: OPED <GO>
For top commodities news: CTOP <GO>
For news on gold: NI GLD <GO>
--Editors: James Greiff, Laurence Arnold.
To contact the writer of this column:
Matthew Lynn in London at +44-20-330-7171 or
matthewlynn@bloomberg.net
To contact the editor responsible for this column:
James Greiff at +1-212-617-5801 or jgreiff@bloomberg.net
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