EDITOR'S NOTE: Investing in gold is set to become a lot more popular in 2022, John S. Tobey writes for Forbes. The longtime fund manager says, “people are getting worried about inflation continuing to rise faster,” and that “investing in gold is an age-old, inflation-protection strategy.” Tobey then goes into a detailed historical breakdown of how gold became a critical investment in the 1960s and ‘70s for investors looking to protect their wealth against rapidly rising inflation. He sees major similarities between this period of economic period in American history and now, meaning 2022 could be the ideal time to buy non-Fungible gold and silver.
In 2021, gold looks like a nonstarter. It has drifted down ~6% even as inflation has sped up ~6%. Is it unpopular for a reason? Not necessarily. Instead, it’s probably the result of investors focusing on other, popular investments.
Disclosure: Author holds Newmont Corporation and Barrick Gold Corporation common stock
But the times are changing. People are getting worried about inflation continuing to rise faster. In the last 12 months, the University of Michigan Survey of Consumers Inflation Expectation has jumped from about 2-1/2% to almost 5%. So, how are they going to protect themselves when safe interest rates continue to track below 2%?
Investing in gold is an age-old, inflation-protection strategy. Additionally, in times of gold popularity, gold mining company stocks can be even better performers. Two examples are:
Newmont and Barrick Gold
The decade-long gold price stagnation from gold’s 2011-12 peak prices caused gold mining companies like Newmont Corporation NEM -1.9% (U.S.) and Barrick Gold Corp GOLD -3.2%. (Canada) to improve strategies, bolster operations and strengthen finances.
With the current lack of investor interest in gold and gold mining stocks, those companies’ stock valuations remain attractive. The price/earnings ratios for both are less than 16.5x, meaning earnings yields of around 6%. Additionally, both have good dividends. This combination puts them in the desirable category of contrarian value stocks with good revenues, earnings and dividend payouts. Add to that picture the potential gains from a growing move to gold investments as inflation rises further.
Gold's propensity is to bubble up when inflation concerns get heated
Inflation was relatively tame over the 10+ years prior to 2021. Now that it's acting up, concerns are beginning. Yet, the "temporary" and "transitory" hopes are controlling inflation fears and likely holding back investor interest in gold investments.
However, the problem is that inflation creeps in until it’s too large to pass off as incidental. Additionally, it varies its pace - walking, then trotting, then cantering, then galloping before drifting back again, albeit now at a higher altitude. The slowdown periods give hope until it is dashed by the run-up returning.
And that's just a "normal" inflationary environment. Today's extreme conditions and beliefs make the U.S. especially susceptible to a high and rising inflation rate. (See "Here Comes An Inflationary Storm Like None Before" for more explanation of today’s situation.)
The bottom line: History offers good support for investing in gold now
The period 1960-1975 shows how stability and confidence can be undermined by rising inflation. It started with Federal Reserve getting worried when 1965's excellent economic and business growth led to rising prices. (This was the year General Motors GM +0.3% was the #1 company, with its stock selling at what would be its forever all-time high.)
To slow down inflation’s speedy rise, the Federal Reserve decided to “tap the brakes” in early 1966. The goal was to trim the economy’s growth rate and squelch inflation's rise. Instead, the Fed trampled growth and only moderated inflation's rise. By late 1966, they reversed course and unwittingly supported the 1967-68 “go-go” stock market, aggressive financial machinations and a speedy inflationary rise to new heights.
In late 1966, when economic conditions had weakened, I found and invested in a new high breakout stock: silver miner, Hecla Mining HL -5.6%. It worked out well as Wall Street moved into inflation protection investments, just as the higher inflation rate was proving to be stubborn in spite of the Federal Reserve’s actions. Such moves were new at the time, following years of steady, low inflation - similar to today’s situation. Therefore, it is reasonable to expect those 55-year old moves to return in some form as the doubts mounting about "transitory" become more widespread.
Originally posted on Forbes.