Using Gold To Combat Currency Debasement

April 25, 2016

Currencies are being debased around the world, and that trend spells trouble for investors ahead if they aren’t prepared for a new era of inflation, Rob Lutts says. Lutts is president and chief investment officer of Cabot Wealth Management, a Salem, Massachusetts-based money manager with some $600 million in assets. He shared with his views on the issue. We’ve seen central banks around the world inflate balance sheets in recent years. While that’s not unusual, from a historical perspective, is there something about what's going on now that’s different or alarming in any way?

Rob Lutts: Yes. This part of the cycle is new. We’ve never created $10 trillion before in the banking system globally. This is now being accepted as a tool that central banks could use effectively, and remove that liquidity that’s been created. But the reality is, we’re now into seven to eight years of this cycle. And we were just told that [ECB President Mario] Draghi, through the European Central Bank, is now going to embark on another four years of his program.

This currency debasement through the creation of new money by the central banks is a very important theme that investors need to study and understand. And it means one thing: Inflation is coming. Is it coming next week? Next month? Next quarter? It’s clearly going to take some time, because there are other factors involved. But inflation is coming, and that should be reflected in gold prices in the next two to three years. In this low-rate environment, there's no way the European Central Bank can expect GDP growth to cover its liabilities, right? What can it do?

Lutts: The reality is, central bankers have one goal. They want to reduce the cost of the large debts for the largest debtors in the world. And the largest debtors in the world are large governments—the U.S. being the biggest of those. They want to reduce the rate of interest for those debtors to a lower rate than growth, and a lower rate than they're operating at. And that is basically taking money away from savers.

How the cycle ends, nobody knows. It’s very possible the U.S. could let their balance sheets shrink a little bit and experiment with that. But it may be that they’ll have to come back within several quarters and reverse trend on that, as we saw what they’ve done in the last two or three months.

So, the script is unwritten here. We’re in new territory. I'm a simple guy with simple beliefs, and more money chasing the same goods and services is one thing I learned in business school: It’s inflation. And we’re going to get it. Do you think then the dollar’s bull run we’ve seen in recent years is over?

Lutts: Everyone has said the dollar has been so strong lately. But if you look back at a chart going back 10 or 20 years, the dollar has really not been that strong. It’s important to compare the dollar against real assets, like real estate, buildings, gold. This is what matters. And the reality is, against those, the dollar has been declining in value for a long time, and will continue.

What’s happening now is we’re the strongest in the economic cycle at this time, and on a relative basis to Europe or the emerging markets, we look like a safe haven. People have bid up our assets, mostly because they want the yield in our country, which they're getting, and they’re paying a little higher for the dollar.

But the long-term trend of the dollar is going to continue to be lower against real assets. And other currencies are all going to be lower relative to real assets. Still, I can't see the dollar being substantially stronger than any other currency. We’re all doing the same thing—we’re debasing. As a matter of fact, the U.S. is debasing more than many countries at this point.

If we thought losing 95% of the purchasing power of the dollar in 50 years was bad, the next 50 years should be substantially larger valuewise, which is hard to imagine, but I think it’s going to be. Maybe, instead of 2.5% inflation per year, it could be 3.5%. That sounds like a small increase, but it’s a very big deal. And it means investors need to be much more careful in the way they manage their money.

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