Gold Is a Reality Hedge on Economic Fears

 | Jul 12, 2017 | 1:00 PM EDT
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There are two issues I've been receiving a steadily increasing stream of queries on: gold and Ethereum.

Because of the huge volatility in Ethereum's cryptocurrency, ether, since I last discussed it a few months ago, and the fact that I've not written about gold since January, this is a good time to address both again.

The first issue to address is that my positive outlook for both over the long term has not changed at all.

My preferred method of speculating on gold appreciation continues to be via the VanEck Vectors Gold Miners ETF (GDX)  -- and I am still expecting at least an average annual return over a 10-year hold of 25%, which is about a 1,000% nominal increase.

The roughly 30% decline in GDX over the past year presents an excellent long-term entry point to take a position or add to existing positions.

The same is true of ether.

When I last addressed ether a few months ago, it was at $80, after having started the year at $8. During the past few months, it spiked to about $400 and has since pulled back to about $200.

There is still not an exchange-traded vehicle allowing for direct investment in ether, and discussing how to do so is not appropriate for this venue.

As with GDX though, the current price is still a very reasonable long-term entry point. There are numerous commercial applications of Ethereum being advanced now, and as they are announced and actualized, the public's awareness of Ethereum and ether will increase.

That will almost certainly cause investor interest in both to increase faster than ether can be mined. 

Ethereum-based block chain applications are still in their infancy, have not yet begun their S-curve adoption and expansion, and as such an investment in ether should now be considered a generational or permanent speculation.

If there is more subscriber interest in the subject, I will expound on the mechanics of buying and holding ether in future columns.

One last point on the subject before moving on, though. Ether is the only cryptocurrency I advocate holding or participating in. The others, including Bitcoin, should be avoided, in my opinion.

The reason I chose to address both gold and ether in this column is that one of the drivers of interest in both is the increasing concern about the state of economies globally and the monetary and fiscal policies being pursued.

As I wrote about last week, the totality of data collection and interpretation in the U.S. has been incrementally morphing toward data creation, narrative making, and ultimately policy decisions based on both.

This isn't just a U.S. issue, though. The ECB is pushing an economic narrative of following the U.S. policy of withdrawing monetary stimulus next year. Even in Japan, there is renewed discussion of an increase in consumption and economic activity that will allow their policy makers to begin to withdraw stimulus within the next few years.

This appears globally to be a conscious decision by policy makers to attempt to affect consumer sentiment and increase consumer spending as a result. An analogy is a tow truck helping to pull out a stuck vehicle when its powertrain is incapable of doing so on its own.

In order for this to work, the created narrative of positive economic activity must still be tethered to real activit,y though. It needs to be just enough to affect change in marginal consumers -- those with the financial capacity to consume but who have chosen to postpone doing so, especially home buyers.

If the created positive narrative is too far removed from reality though, even the marginal consumers won't respond.

A created narrative may be viewed by policy makers not as lying, but as a pragmatic and necessary extension of monetary policy encouragement.

The rhetoric and actions by policy makers in the U.S., Europe and Japan appear to be driven by the belief that Japan's lost generation could perhaps have been avoided if the policy makers had taken an active role in selling a positive economic narrative, rather than in just responding with various financial measures.

I don't know if any of this is what is actually happening.

What seems clear though, is that policy makers in the U.S. and Europe, at least, are going to try to withdraw financial stimulus and sell the need for doing so to their respective consumer bases.

Gold is a hedge against their failing in the process.

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