The Federal Reserve’s stated mission is to provide “the nation with a safe, flexible, and stable monetary and financial system.” This has historically meant doing its best to keep inflation levels stable and low. It has achieved this goal for more than two decades now, but has decided to shift its focus a bit toward increasing the pace of economic growth. Other central banks across the globe have a similar stance, and this is worrying a number of market experts that it could eventually lead to high inflation. Gold is known as a solid inflation hedge, and could earn this reputation in 2013 if inflation picks up. Below are three well-known gold bugs and their bold predictions for investing in gold next year and beyond [for more gold news and analysis subscribe to our free newsletter].
“I am not selling my gold and silver…gold and silver will both go much, much higher over the course of the bull market.”
The above quote was attributed to Jim Rogers in an October interview. Rogers has been an advocate of physical assets and commodities, including gold, throughout his investing career. His initial success was as a co-founder of the Quantum Fund, along with George Soros in the 1970s that coincided with one of the larger commodity bull runs in recent times. In the above quote, he appears to be arguing that strong stock market returns will support higher gold prices, not so much because stocks are moving higher but because the potential exists for a market correction if and once the market falls. Rogers has been highly critical of expansionary monetary policy, which increases the money supply and can lead to asset bubbles, such as the stock market.
“As inflation picks up, the real price of gold goes up.”
Critics of expansionary monetary policy, including Rogers, worry that it will lead to inflation. Jeremy Grantham, who heads firm GMO that runs $97 billion in client assets, wrote the above in a recent letter to his clients. The Forbes article that detailed the quote also referenced the well-known Credit Suisse Global Investment Returns Yearbook that explained gold can be a great hedge against inflation. It attributed this to the simple fact that investors turn to gold during times of uncertainty and that this expectation becomes a self-fulfilling prophecy, meaning that this increased demand drives gold prices up. Interestingly, the study found that investing in stocks also offers an inflation-hedge and that stock returns have far outpaced gold returns over time. However, both asset classes have appeal during periods of inflation [see also Timber Set to Soar Says Jeremy Grantham].
“By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold.”
John Paulson is best known as one of the few investors to have bet big on the bursting of the housing market. He grew fantastically wealth because of the timely call around 2008 and has picked up billions of dollars in additional assets to manage in his hedge funds. So far in 2012, Paulson has invested rather aggressively in gold-related assets, including buying the shares of gold miners and producers, as well as investing directly in the SPDR Gold Trust (GLD). His arguments echo that of both Rogers and Grantham in that he expects gold to rise if and once inflation accelerates, which could occur because of easy money thanks to expansionary monetary policy.
It’s important to note that these investors aren’t making a specific call that inflation will increase in 2013. They just expect it to accelerate at some point going forward. It could be as soon as 2013, or beyond that, though there is also of course the possibility that inflation levels don’t pick up that much at all.
Disclosure: No positions at time of writing.