In 2011, I was really right. The Federal Reserve was starting its third round of quantitative easing -- QE3, which seemed to be turning into QEInfinity -- and there was no end in sight to the money-printing. Everybody was scared to death of inflation. Furthermore, the budget deficit was, at one point, more than 10% of gross domestic product, and it looked as if the deficits were going to be structural and permanent.
Fast-forward to today. The Fed is tapering quantitative easing. The deficit has collapsed, as new taxes have raised record revenue and the government has not appreciably expanded. Also, incredibly, everyone is now worried about deflation, not inflation.
That includes central banks. Central banks, all of them, are busy trying to create inflation.
Well, central banks usually create inflation when they aren't trying, so I imagine they will be very successful if they actually try. In fact, we are already starting to see some inflation, as I discussed in a previous post. It will be interesting to see how quickly the Fed will react. I predict it will hardly react at all. Fed Chair Janet Yellen has given every indication that she will allow inflation to overshoot significantly while the Fed readies a response.
Gold is impossible to value. People have tried. I will say that gold represents a much more compelling value at $1,300 per ounce than at $1,900 when you consider that every major central bank is out there trying to create inflation. Also consider that, in many developed countries, inflation is rising rapidly.
Back in 2008, people used to ask me: Why buy gold if you think there is going to be inflation? Just short bonds instead. As you can see, that didn't work out so well for them. What I told them was that gold isn't just about inflation. It is also about the rule of law and property rights, and investors were plenty spooked about that back then. But most of the time, yes, gold is about inflation -- and so inflation is clearly rising, and we have the answer right in front of us, and everyone is sitting around with hands in pockets.
Technically speaking, gold has been basing for the better part of a year now, and on new highs around $1,400 or so it will be clear that a bottom is in. Sentiment is also very poor. The gold promoters have been completely discredited over the last few years, and there is a handful of pundits who make a living slamming the gold bugs all the time. I think they have gotten exceedingly smug, and I think the narrative is already starting to change.
Gold is still my largest position (along with Market Vectors Gold Miners ETF (GDX)), and I looked really smart in 2011 and really dumb just a few months ago. For me, it is a 20-year trade. That is the nature of gold investing. Some people will hold it forever. I think that is a mistake. I think there will be a time to sell, years from now, at levels much higher than $1,900 an ounce.
To be clear, I'm not trying to get rich on gold. I'm only trying to protect myself from the errors of the people running both the government and the Federal Reserve. When the authorities are doing things right, it's a bear market in gold. When they screw up, it's time to buy.
At the time of publication, Dillian was long GLD, SLV, GDX, SIL and physical gold and silver.
Editor's Note: This article was originally published at 11:00 a.m. EDT on Real Money on Tuesday, June 24.