Inflation to come fears are ovestated, yet again.

paulren's picture

Gold/commodities vs. diversified goods growth stocks.

On the now extended disagreement Gold vs. goods stocks. Which investor chosen longer term themes are better? Here is how I see it.

In recent years there have principally been: 1) the “inflation is coming back” advocates with their “just own lots of gold and/or commodities and go on with life” attitude. 2) The stock investors which see a rebound and then some.

The gold bugs feel vindicated as the US housing ninja bonds bombed out, creating the financial tsunami and the global recession was the result. Gold barely held its value, yet compared to financial assets which dropped gold was a decent choice up until now. But what about the feared inflation*? Well, that never materialized, au contraire. Record low amount of inflation all around the world are now the reality, besides interest rates remain low.

The robust gold bulls now point that inflation is going to roar back and in a big way -because all that newly created money which has been pumped into circulation. Both the US FED and the US Gov. have gone on unprecedented expansion of money supply and spending programs ballooning into elevated inflation worries in 2-3 years. The EU as well but to a far lesser extend. Conclusion, own gold as the preferred asset.

At the end of ’08, when I wrote in our member lounge that a new bear market in bonds started it was not on inflation fears in the market, but instead massive federal deficit spending in the making which would push up % rates a bit and so bond market values down.

The gold bulls count on inflation coming back as it’s the historic metal of choice to protect long term wealth into preserving its real, i.e. after inflation, value. So lets ask what if they are wrong? Then, stocks would (as they have historically) provide better returns. What if there is little inflation for some years to come as I think so. Then overall high yielding financial assets will be the preferred assets you want to own. In that scenario the current accelerated recovery of stocks here in Thailand (as in many other countries) would likely be continued and the gold price would be the laggard, as it has this year. Of course there are many other factors which will swing things around, here I am just comparing the gold/commodity fans vs. stock fans.

The high US unemployment along with a deleveraging never seen there before will for years tame global demand and so remain still the biggest, albeit least growing of all major economies. Americans have abruptly changed from living beyond their means to nowadays saving more along with working down debts. It’s a must and a new-fangled want. There is now a new era of frugality brewing in USA. Deleveraging now in progress will there take years and the retrenchment of the American consumer will mark a deflationary era. In that way I much disagree with others like Marc Faber and Jim Rogers of the world whom continue their long held position of collapsing dollar and soaring inflation.

Total global demand will remain weaker and longer then now anticipated -and so will low inflation. Niche economies and companies here in Asia will so perform the greatest, in my view.

Inflation fears are rightly so never dead. Except for a brief period, around year 2007, inflation fears have for long been overstated Inflation cloud distantof late. Gold will remain boring or sideway up in my view. In the meantime, I will stick with a portfolio of high yielding Thai smaller cap growth stocks which don’t depend on the US consumer and unlike gold yield high dividends along the way.

Best Regards,

Paul A. Renaud. 

* With inflation I mean the actual consumer price index change, as it affects the average person, over time. Not some yo-yo graph on commodities.

For a previous article from 3 years ago in how at that time I presented this to Marc Faber, see here: