There are several reasons to be bullish on gold, but I think most of these reasons apply more to the long run. The short run is too hard to predict. If it was easy, then I would be extremely wealthy.
I am an advocate of owning gold and other investments that correlate with the price of gold. I always caution against gold mining stocks. It’s not that I don’t ever recommend mining stocks or buy them myself, but I warn people that they are a very risky investment.
The main reason for owning gold (or gold equivalents such as GLD) is for insurance. It is a hedge against massive currency depreciation. It is a hedge against disaster. It is a hedge against long-term fiscal insanity from governments.
I recommend having 25% in gold and gold-related investments as part of a permanent portfolio. It is there to pull up your portfolio during times of higher price inflation.
It is ok to add more gold to your portfolio, but then it should be viewed as a speculation, just as owning any mining stocks would be speculative. Gold obviously has periods where it goes down in terms of U.S. dollars (or whatever currency you are dealing with). If you live in Venezuela and own some gold, then you probably aren’t going to exchange it for the local currency, which has undergone hyperinflation. But in most places, if you want to actually spend your gold, you would likely first convert it back in to the currency that is widely used.
In terms of U.S. dollars, gold has done really well since about the turn of the century. If you bought an ounce of gold for under $300 in 2000, then you have done well. It has been a rougher ride since about 2011.
If we go through a recession in the near future – which is looking more likely with a yield curve that is almost inverted – then I don’t expect gold to perform well in the near future. When the financial crisis struck in 2008 and early 2009, gold went down with stocks, although not nearly as much as stocks. When there is recession that is not accompanied by high price inflation, people seek safety in cash and bonds. This is particularly true in the U.S., where U.S. Treasury bonds are seen as the safest investment. As people seek safety and liquidity, gold tends to not be in high demand.
But longer term, things are more bullish for gold. If we do hit a recession, it is likely that the Fed will stop deflating and start inflating its balance sheet again. It is likely to lower its target interest rate. An easy money policy from the Fed tends to be bullish for gold.
On top of this, the national debt is about $22 trillion, with unfunded liabilities estimated to be as high as over $200 trillion. During our current so-called prosperous time, the federal government is still running annual deficits in the ballpark of $1 trillion. Those massive deficits are projected to continue even without accounting for a major recession.
In the long run, this is all bullish for gold.
Public Opinion and State Laws
The Mises Institute recently published an article about how some states are changing their laws to exempt gold from capital gains taxes. This is not a concern for residents who live in a state with no taxes on income and investments (at a state level).
Some libertarians preach for a gold standard. The proper libertarian position is that the free market should determine what should be used for money. It’s just that gold (and, to a lesser extent, silver) has historically been chosen by the marketplace as money. A government-run gold standard would, however, likely be much better than the pure fiat standard we deal with today.
In order to get closer to a free market in money, I believe it is important to repeal legal tender laws. When Ron Paul was in Congress, he would regularly sponsor legislation to repeal legal tender laws.
But perhaps the most important aspect of this is to repeal any taxes associated with gold and silver. As it currently stands, you are supposed to pay capital gains taxes on gold and silver. If you bought a one-ounce gold coin for $300 and later sold it for $1,300, then you would owe taxes on the $1,000 gain. This seems rather unjust considering that the gold price increases over the long run largely due to inflation. Yet, you have to pay taxes because of the “gains”, which is really mostly currency depreciation. On top of that, the government considers it a collectible, which can mean a higher tax rate.
Most individuals probably don’t pay taxes on small transactions of physical gold, or at least that is my guess. But a major business is not going to disobey the law and make transactions in gold if it could ruin the business. If a business were to say that people could transact in gold (or electronic equivalents representing gold), then it would present a problem of calculating taxes owed. Every purchase would have to be translated into dollars in order to track any capital gains on the gold. It would just be a total mess for all parties involved.
Therefore, I believe that getting rid of the federal tax on gold and silver would be a major step forward in allowing money competition. It is a great sign that many states are eliminating these taxes, or at least considering it.
This can be compared to marijuana laws. In the case of gold taxes, states are not defying the federal government as they have with marijuana laws, but I still see a close resemblance. When public opinion is shifting, it is more likely to show up at the state and local levels. The federal government may just be lagging behind in gold taxation, just as it is lagging behind in marijuana legalization.
I believe it is just a matter of time before the federal government legalizes marijuana, or just leaves the matter up to the states (which would be the proper Constitutional position). This could easily happen within the next few years. Hopefully the same can be said for eliminating taxation on gold and silver. I am not saying it will happen in the next few years, but it is a possibility. It is more likely now than it has been for a long time.
If the federal government were to eliminate taxation on gold and silver, I would expect the demand for gold and silver to go up. I would expect the price of gold and silver to shoot higher. Just the announcement that such legislation was likely to pass would probably drive the dollar price of gold higher.
I have not been a big fan of Bitcoin, but it has surprised me how much it took off. If I had known there would be so much fanfare around Bitcoin, I would have bought some bitcoins early on and made a bunch of money. I think the Bitcoin bubble will collapse (if it hasn’t already), but it is promising that there is so much interest out there for competing forms of money.
With the popularity of cryptocurrencies, and with state legislatures taking action to eliminate taxation on gold, this could ultimately be a bonanza for those who own gold. Silver is a little less clear, but silver investors would likely benefit too.
As people seek alternatives to the U.S. dollar and fiat currencies in general, we will hear more about this subject other than from predominantly libertarian and gold bug websites. This is bullish for gold over the long run. If you are going to buy and hold an asset, gold seems the most promising, but you’ll have to be patient.