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precious metals

I've been a gold bear for four years, but no longer: I think gold may soon rise significantly.

Why did I change?

In a word: Stagflation. It is the toughest investment regime, composed of inflation and economic stagnation. The last time we saw this was in the late 1970s. And it's coming again. In such a period, one of the only investments that appreciates is gold.

There are four investment regimes in all, defined by economic growth and inflation: In high growth and high inflation, real estate and resources do best. In high growth and low inflation, growth stocks outperform. Low growth and low inflation is where bonds shine. And low growth and high inflation is where most stocks underperform, but gold does best.

Knowing which regime we are currently in isn't hard. The harder part is sticking to the best investments for that regime and not trading them. What's the hardest part? Knowing when a regime is ending, and adjusting your portfolio in time. Such a change is upon us: from high growth and low inflation, to low growth and high inflation – i.e., stagflation. Hence my changed view on gold.

Just how certain am I that growth is slowing and inflation awakening?

The evidence is piling up for both.

The economy's weakness is self-evident: Commodity prices – copper, iron ore, oil – have all gone downhill, partly due to the slowdown in China, partly to Europe's.

As for the United States, a new president usually gives the U.S. economy bitter medicine in the first two years, to get re-elected after two recovery years. A new president will be elected in November and the market usually anticipates this by nine to 12 months – i.e., now.

Last, but not least, the U.S. Fed just raised rates to slow the economy. Junk bonds sensed it and cratered. This was a sign that the U.S. economy should weaken soon.

What of inflation?

Here, too, the picture has become clearer. The money heap printed by the U.S. Fed and other central banks during the past six years is about ignite inflation: This money is not money supply, but rather money stock. Money supply is money stock (how much the Fed prints) times money velocity (how many times a dollar circulates in a year), and the latter should accelerate once market activity rises during a change of investment regime.

Just listen to Mario Draghi, head of the European Central Bank, who vowed to reignite inflation – this, in the same week that the U.S. Fed chief Janet Yellen said inflation is below target and she'd like to see it higher. Coincidence? I don't think so.

With all central bankers pushing publicly for inflation, it must soon arrive. But it often overshoots its target, and the Fed must then raise rates to rein it in – which would weaken the economy further. This has already begun, probably, as the crumbing of junk bonds indicates.

Well, then. If it's hard to make money in stagflation, or even maintain the value of what you have, why not simply keep cash for a while?

First, because inflation erodes its buying power. But second, and more insidiously, European banks now charge 0.5 per cent a year to keep cash. Even the Bank of Canada asked for permission to have negative interest rates in future. And Harvard professor Kenneth Rogoff floated the idea of disallowing physical cash altogether.

In Sweden they're already on the way to do this. Will negative bank rates come here, too? No one knows. But when governments worldwide are enemies of cash, think twice about holding too much of your wealth in it – but do keep some on hand to buy those future cheap stocks.

What of bonds? Unfortunately, once inflation ticks up, bonds underperform, too, as long rates rise.

In sum, gold's time has arrived. Yes, it may dip one more time, to trap the last bears, but in two or three years, its price should be higher. It's time to start sprinkling some gold dust on your portfolio.


You can simply buy bullion or gold coins and stash them in your safety deposit box. Or, as I do at Acernis, look for dividend-paying gold stocks with good balance sheets and (this is very important) trustworthy management.

Finally, on a personal level, if you planned to sell some of your gold jewellery, wait a year or two. You'll likely get more for them later. On the other hand, if you were planning to buy a gold bijou or a ring for your beloved, do it soon. In a year or two, it'll likely cost you more.

Avner Mandelman is president and CEO of Acernis Capital Management Inc. Acernis may occasionally have long or short positions in securities mentioned in this article.

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