Will Gold Outperform Equities In The Long term?

Brent Johnson, CEO of Santiago Capital, was recently on CNBC. “Buy gold if you believe in math,” he told viewers. Since he is a friend, I followed up with him on a call.
 
“Longer term, I think gold goes to $5,000 over a number of years. If they continue to print money at the current rate, I think it could be multiples of that. I see a slow steady rise punctuated with some sharp upward moves.
 
“When you have something as big as the monetary system itself going through its potential death, you have a lot of volatility. That can work for you to the upside and the downside.”
 
But why has gold come down?
“I think there were a number of people in gold who did not really understand the metal; gold has been moving up for a number of years, which probably drew more people in and pushed it up higher.
 
“The debt downgrade of the US in 2011 also pushed it higher. It went up quickly in a short period of time. When that happens, we tend to see a pullback.”
 
So the current bear market in gold is a result of the fast move up?
 
“That pullback has been exacerbated by people’s willingness to ignore what is going on. The Fed and Central Banks have convinced the general population that they will make everything okay. As a result, people have had the confidence to put their money into the stock market. That has led to asset inflation in housing and stocks – not so much commodities like gold and silver. This asset inflation is a result of QE.”
 
Why hasn’t QE led to more inflation?
“I think we have seen inflation. It’s just in places that the public does not recognize as inflation. Today, inflation refers to an increase in prices. We have had asset price inflation – real-estate in big cities, farmland in the Midwest, and stocks.
 
“This inflation has not been reported in the CPI, but the true asset price inflation is high.
 
“Another reason why the CPI has stayed low is the way the money system works. When they put the money in the system, it goes to banks’ excess reserves. In my view, the fact that they do not want to lend out that money indicates that they do not believe the counterparties are really worthwhile or that the economy is that strong. They keep that money at the Fed – so they get a guaranteed return.
 
“We will see inflation go much quicker when the banks actually start putting their money to work. And that’s when we’ll see the real strength of gold as an asset.”
 
Will gold outperform equities in the long term?
“In the very short term, I think gold has seen the bottom and will continue to come out of it. We can of course revisit the lows. I think we are reaching the limit of where we can pump QE into the system.
 
“A lot of the fear caused by tapering has been subdued. QE in some form is here to stay. It will go on much longer than previously thought, and we will begin to see people react. Of course, equities can go higher. I am not predicting an imminent crash.
 
“Eventually, there will be another 2008-style crash. I do not believe that printing money works. You have to pay the piper. We will hit the problems of 2008 again. There will be a crisis in bonds and currency. We will see the true power of gold then.
 
“The reason is the way the monetary system is designed. It has a design flaw: there is no reverse gear. It is designed to get bigger. If it gets smaller, it crashes. So it is an inherently inflationary system. And when something grows every year – or almost every year – it eventually goes exponential. We are approaching that exponential point now. When this happens, the system gets bigger and the pace at which it gets bigger increases. At that point, the system will either go straight up and cause massive inflation or crash the monetary system. Under either scenario — extremely high inflation, or a crash of the monetary system – I want to own gold.”
 
So should we buy gold to protect ourselves?
“Do not sell all your assets to buy gold. You can have gold and equities. Have land and real-estate, and maybe artwork too. Just own some gold as well,” Brent believes.