The fourth quarter is starting with a bang for precious metals markets. Silver, in particular, posted a big breakout move – surging to a four-month high above $21/oz.
Bulls see the potential for a big metals rally to finish the year. However, 2022 has seen gold and silver markets struggle to gain sustained traction.
Longtime precious metals naysayers such as personal finance guru Dave Ramsey point to gold and silver weakness throughout most of the year as evidence that they don't protect against inflation. Are the anti-gold bugs right?
It is true that gold and silver prices retreated as the Federal Reserve launched its most aggressive rate hiking campaign in decades – propelling the Federal Reserve note “dollar” to surge.
It's also true that 2022 has been a historically bad year for most asset classes. It's been disastrous for a diversified stock and bond portfolio that Dave Ramsey and other financial advisors conventionally recommend.
According to CNBC,
“From the start of 2022 through Sept. 28, a 60/40 portfolio invested in line with benchmark U.S. stock and bond indexes shed 20%. Only two calendar years — both during the Great Depression — have been worse.”
Gold, meanwhile, has held up relatively well. It has fallen around 6% in U.S. dollar terms this year while rising against virtually all of the world’s other major currencies. U.S. dollar “strength” is temporary. Inflation is here to stay.
The Fed will have to back off on rate hikes at some point, likely soon. Then the forces of inflation and economic weakness pointing to recession could combine with a declining dollar to drive precious metals prices massively higher.
Few other asset classes can generate strong returns in an environment of stagflation.
Yet according to Dave Ramsey, in a recently posted rehash of his boilerplate objections to gold, “Investing in Precious Metals Is a Bad Idea.”
Ramsey claims gold and silver fail to protect against inflation and would be useless during a financial crisis. He wrote,
“The prices of gold and silver are so unstable (and have been over time) that the only use for them in an economic crisis would be to hope someone would take your silver coins or watch in exchange for a pack of toilet paper or a can of gas.”
The case for owning precious metals doesn’t rest on using them as direct barter instruments. The global market for gold and silver is deep and liquid. Bullion can always be sold for cash.
But yes, gold and silver coins can also be used directly as money in exchange for other goods or services. Bullion holders sleep well at night, knowing they won’t lose access to their tangible wealth if the banking and brokerage systems freeze up.
Gold has historically retained its purchasing power better than any printed paper currency. Yet Ramsey claims,
“It has a crummy track record as an investment.”
Ramsey has a crummy grasp of recent history. From 2000-2010, gold gained a cumulative 280%. But for the stock market, it was a lost decade. The S&P 500 fell 24% over that same period.
Ramsey asserts,
“Since the dollar isn’t backed by gold anymore, investing in this precious metal won’t help you if inflation hits.”
The whole point of gold as an investment thesis is that it serves as a hedge against an unbacked dollar. It’s as if Ramsey suffered from a weird mental glitch when he made that nonsensical statement.
During the 1970s, as paper assets got destroyed by inflation, gold delivered average annual returns of 30.7%. The S&P 500 barely eked out nominal gains of 1.6% per year – which were far too puny to keep pace with an inflation rate that surged into the double digits by the end of the decade.
Gold and silver price performance can be disappointing during any given calendar year. Metals investors should have a long-term time horizon and be prepared to endure an inevitable downswing.
Gold and silver serve a valuable niche within an overall investment portfolio. Financial advisors who exclusively advocate paper assets (stocks and bonds) have no real strategy for surviving stagflation.
At the core of Ramsey's teachings over the years has been his aversion to debt. He advises people to cut up their credit cards. He recommends that homeowners pay off their mortgages as soon as possible.
But he didn’t change his advice even when rates were at historic lows. Those locked in or refinanced at a low, fixed-rate obtained a powerful inflation-fighting tool. As the U.S. dollar depreciates, they will see the real value of what they owe actually go down.
Ramsey’s recommended mutual funds won’t necessarily regain their recently lost value as inflation persists.
And while nothing is sure about the future direction of any asset market, precious metals have the potential to greatly outperform financial assets during a 1970s-style economic cycle that now shows signs of being underway.