Gold Price: Is Gold the Only Hedge Against an “Everything Bubble”?

Wednesday, October 11, 2017

gold and money

Gold is typically seen by most investors as a hedge against very specific ills: specifically, inflation and the stock market. With the stock market continuing to set records during the “Trump rally,” it’s clear that very few people see the need for gold as a hedge there, at least right now. And as for inflation, the Federal Reserve seems to hold the opinion that it’s not high enough.

This has created a state of general unease that some are calling the “everything bubble.” It seems that prices have gotten overinflated in some sense, because there isn’t as much confidence in the markets as the prices of equities might suggest. So what’s really going on here, and might gold be the hedge against the next bubble popping?

Defining the “Everything Bubble”

Says Business Insider: “In 2007, we had the housing bubble…in 2017, we have the everything bubble.” What that means is that there’s no specifically overinflated segment of the market that would lead to a market meltdown. If stocks appear highly valued—which they currently do—with other segments of the economy not in a bubble, you might have something similar to 2000, during the “tech bubble.” But with so many asset classes outperforming expectations, the idea is simple: there is no one single bubble here. The entire economy appears larger than it should be.

In 2007, some saw that the housing market was the match that could light a fire that brought down much of the economy. That turned out to be the case. What is that match today? No one seems to know. And that points to another potential culprit in the next financial crisis: inflation.

Are We in an Inflationary Period?

Although the traditional metrics for inflation appear to point to meager price increases, the concept of an “everything bubble” goes against this concept. After all, if the prices of everything are too high, that’s the very definition of inflation!

And if gold is a hedge against inflation, the precious metal is also a hedge against this “everything bubble.”

The trouble here is that inflation appears hard to identify. Though Seeking Alpha sees inflation on its way, saying “fasten your seatbelts,” and some call this the natural consequence of the Federal Reserve’s long-term actions against the crisis since 2008, the truth is that inflation has yet to show up in the numbers.

Using Gold as a Hedge Against Everything

The concept of gold as an investment is sometimes misunderstood. Gold is more like the most ancient form of money—a way to store wealth in a more permanent state when you’re not sure where else to store said wealth. Investors flock to gold in times of inflation because the currency loses value, but gold tends to hold to that value on a long-term basis.

That would make gold an ideal hedge against an “everything bubble,” as some see it. But with the current state of the economy, that may be result from a general sense of confusion. The concept that “what goes up must come down” has people in the markets on edge—unless they have some of their money in gold.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.