Using Gold To Combat Currency Debasement

One financial advisor sees a wave of inflation coming, and he'll use the yellow metal to ride it out.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

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. Inflation, dollar weakness … is that why you like gold?

Lutts: I'm very interested in gold today, because gold tends to anticipate the inflation cycle by as much as a year or more. And it’s interesting that gold looks to have started a new upward trend after a five-year period of interruption in the bull market that was going on. This is not uncommon. You can get many years of corrective phases.

But we went from as low as $200-300 up to $1,900. And we came back to $1,100. It would be very normal for us to now have another acceleration in gold. And, longer term, the objective for gold can be very high. It could be much higher than most people expect possible today. We’re talking $2,000 to $3,000, $4,000. That’s not out of the realm of possibilities. Is that your outlook on gold prices?

Lutts: Well, not that long ago, we were at $1,900 or so, just a little shy of $2,000. I have no doubt we’re going to be there again, and climb higher. What’s your recommendation for ETF investors? What should they own?

Lutts: First, longer term, owning equities across the world is a good idea. Equities generally keep up pretty well against inflation. They're a good hedge.

The gold-hedged ETFs [the REX Gold Hedged S&P 500 (GHS) and the REX Gold Hedged FTSE Emerging Markets (GHE)] are also a very good idea. I’ve long been a believer that we need to protect against the negative impact of government actions on people’s savings.

In the last gold bull cycle, I had my equity accounts have direct gold holdings, either through bullion or shares like American Barrick or Newmont, of as much as 10-15% of the value of the account. That acted as a pretty good protection. It acted as a profit generator for many years. But we had to actually recognize there’s a time to leave, too. And we did reduce those positions up around the price of $1,650 or so.

Just recently, we’ve been raising them up again. This is the way I do it as a professional investment manager: We actually buy the direct bullion, or we buy the shares directly of local mining companies to protect against this debasement.

A good product that’s come onto the market is these Rex Shares ETFs. I particularly like the fund that relates to emerging markets. These markets have been out of favor five years. There's tremendous value in many of those economies; Russia, for instance, Brazil, India as well.

It’s a great way for investors to get good equity exposure at a modest value, and then have the protection with the 1-on-1 hedge to gold that protects against debasement, but also allows for appreciated value through the bull market in gold.

The worst thing you can do is keep your money in currencies under the mattress. That is probably the worst investment in this coming cycle. And people are going to understand that more this cycle than we’ve seen in past cycles.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.