The Federal Reserve’s stated mission is to provide "the nation with a
safe, flexible, and stable monetary and financial system." This has
historically meant doing its best to keep inflation levels stable and
low. It has achieved this goal for more than two decades now, but has
decided to shift its focus a bit toward increasing the pace of economic
growth. Other central banks across the globe have a similar stance, and
this is worrying a number of market experts that it could eventually
lead to high inflation. Gold is known as a solid inflation hedge, and
could earn this reputation in 2013 if inflation picks up. Below are
three well-known gold bugs and their bold predictions for investing in
gold next year and beyond.
Jeremy Grantham
As inflation picks up, the real price of gold goes up.
Critics of expansionary monetary policy, including Rogers, worry that
it will lead to inflation. Jeremy Grantham, who heads firm GMO that
runs $97 billion in client assets, wrote the above in a recent letter to
his clients. The Forbes article that detailed the quote also referenced the well-known "Credit Suisse Global Investment Returns Yearbook" that
explained gold can be a great hedge against inflation. It attributed
this to the simple fact that investors turn to gold during times of
uncertainty and that this expectation becomes a self-fulfilling
prophecy, meaning that this increased demand drives gold prices up.
Interestingly, the study found that investing in stocks also offers an
inflation-hedge and that stock returns have far outpaced gold returns
over time. However, both asset classes have appeal during periods of
inflation.
Jim Rogers
I am not selling my gold and silver … gold and silver will both go much, much higher over the course of the bull market.
The above quote was attributed to Jim Rogers in an October interview.
Rogers has been an advocate of physical assets and commodities,
including gold, throughout his investing career. His initial success was
as a co-founder of the Quantum Fund, along with George Soros in the
1970s, that coincided with one of the larger commodity bull runs in
recent times. In the above quote, he appears to be arguing that strong
stock market returns will support higher gold prices, not so much
because stocks are moving higher but because the potential exists for a
market correction if and once the market falls. Rogers has been highly
critical of expansionary monetary policy, which increases the money
supply and can lead to asset bubbles, such as the stock market.
John Paulson
By the time inflation becomes evident, gold will probably have
moved, which implies that now is the time to build a position in gold.
John Paulson is best known as one of the few investors to have bet
big on the bursting of the housing market. He grew fantastically wealth
because of the timely call around 2008 and has picked up billions of
dollars in additional assets to manage in his hedge funds. So far in
2012, Paulson has invested rather aggressively in gold-related assets
including buying the shares of gold miners and producers, as well as
investing directly in the SPDR Gold Trust (GLD). His arguments echo that
of both Rogers and Grantham in that he expects gold to rise if and once
inflation accelerates, which could occur because of easy money thanks
to expansionary monetary policy.