But what about the dollar being devalued? Again, the dollar is stronger than the panicky masses think. The U.S. Dollar Index (DXY), which measures the strength of the dollar versus other benchmarkcurrencies, is up nearly 14% since 2011, despite the Federal Reserve’s QE.
Goldbugs believe the shiny yellow metal serves as a proxy currency to replace weak fiat money. If marketforces dictate the rise of gold prices as the dollar falls, then the inverse — gold prices falling as the dollar rises — is inevitable.
The Fed has also hinted that it may begin slowing down or “tapering” its bond purchases. This indicates an eventual end to QE and the debased currency. If you think gold prices have a downward bias now, wait till tapering really begins!
 | ||
| Physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coinbrokers, etc.). |
You’re Still Not Getting Paid
As I said in my earlier article, my biggest beef with owning gold is that, unlike dividend stocks, it pays you zilch.
Think about the classic goldbug argument: Invest in gold as an inflation hedge. I just can’t see the logic in this outside of protecting a portion of your wealth. The simple explanation of inflation is that it takes more money to buy less.
In an inflationary environment, the value of your gold may be going up. Good for you. But don’t you need more money to buy things? If that’s the case, shouldn’t you own assets that give you better cash flow?
Since physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.), assets with growing cash flow make more sense, especially those tied to hard assets.
Energy pipeline master limited partnerships (MLPs) have always been one of my favorite tools to accomplish this. Oil mover Buckeye Partners, L.P. (NYSE:BPL) is a good name to use, as is Boardwalk Pipeline Partners, LP (NYSE:BWP) in the natural gas space.
Risks to consider: Again, I could be completely wrong. Any major events in the Persian Gulf, Europe or the Korean Peninsula could send gold soaring on the fear trade. Global economies could erupt into chaos, and QE could go on forever, which means that we’d eventually use paper currency as bathroom tissue. It’s always a possibility, but realistically, the chances are probably slim. U.S. GDP growth, while not stellar, has improved dramatically, surging from negative 8.9% during the 2009 recession to a positive 1.8% currently.
Action to take –> As the U.S. economy continues to improve steadily, the Federal Reserve prepares to dial back its QE policy, and investors continue to rotate into stocks, the price of gold is poised to fall further. Look for another down leg in the range of $1,000 to $900 an ounce. That’s another 20% to 25% loss.
In my previous article, I compared buying GLD to buying Apple Inc. (NASDAQ:AAPL) near its topped-out price of more than $700 a share. But I’ve changed my opinion — Apple Inc. (NASDAQ:AAPL) may be worth a look. Shares are off nearly 40% from that bloated price. Thanks to that correction, the stock’s dividend yield now sits at an attractive 2.9%. That’s nearly 300% more than what gold is paying you right now — or ever — for that much.
