Stocks crashed hard today, the NASDAQ was down 4.4%, the most in 7 years. Yet gold, which many people think is a hedge, only went up 0.22%. I believe the intrinsic value of gold, based on inflation indexes, is roughly $800, some $436 below today’s price of 1,236. Thus in theory gold should first need to drop to a “cleansing crash” bottoming out price of $800 and then later, during a recession, a new round of inflationary stimulus will make it go up.
To generate massive inflation society would first need to go through a dramatic, deep recession that would trigger bipartisan demands for aggressive reflation. Thus it is way too early in the cycle for gold to go up. Instead, during a recession some people will sell gold in response to margin calls on their stocks. Others will sell gold because they need spending money during a recession. Some will sell because an expanding recession and stock crash will justify a tactical deflationary slant to investing, at least for a brief while, before reflation policies are implemented by Congress and the Federal Reserve.
The consensus of bearish investors is that somewhere between 1,100 and 1,800 is the fair value of the SP500, which would average to roughly 1,450, a 50% drop from the peak. Since the previous two recessions in 2002 and 2008 had roughly this much of a drop then I expect the same to occur.
A crash and recession will result in reflationary policies, but the excessive debt load of the private sector will inhibit spending and make it hard for many to qualify for a loan even if the rate charged is zero would-be borrowers still have to qualify for a loan from the bank. If you have a 30 year mortgage fully amortizing with a zero interest rate you pay back monthly payments that are the same as payments on a 3.33% interest-only loan (or like 4.75%, for someone in a 30% tax bracket, if one gets a tax deduction for interest), so cutting rates doesn’t make loans more affordable, especially if one counts the lost tax deduction on a zero rate loan. Imagine cutting rates from 4.75% to zero and not making a difference!
For several decades I remember many inflation scares where many people leapt to the conclusion they should buy natural resources such as gold, timberland, farmland, industrial commodities, and mining companies, etc. as a hedge against inflation Yet many of these assets were disappointing, especially compared to the SP index.
Commodity investing has underperformed because over the past 200 years technology has been developed to harvest commodities more cheaply. Meanwhile the economy of the future is technology and professional services like medical care. As these grow in popularity then less resources will go into commodities, and as tech stocks produce outsized profits there will be less emotional appeal to invest in a warehouse of copper or a coal mine or a timber farm. As long as investors believe that the 100 year average total return on stocks has been about 9% a year then why would they want to buy gold and pay storage and insurance fees and not get any yield on it? Also capital gains tax on collectables are 28% rather than the 15% rate for stocks and real estate.

  If one forecasts a dramatic rise in inflation they may be able to simply buy 90 day T-Bills and roll them over and as inflation rises the marketplace will most likely force yields up, even if the Fed tries to suppress that. It happened in the 1970s when inflation went to a range of 6% to 12% and yields were often high enough to compensate for inflation.

  If one had bought gold when it became legal in the 1970’s they might have incurred an average cost of $150 an ounce. If they sold it in the 1980’s then it stabilized at $400 they might have made roughly the same as the yield on bonds during that time.
During a stock crash the only hedges are put options and cash. It would be a good idea to avoid stocks that are as high priced as broad indexes which have a PE10 of roughly double the reasonable level of 15.
Basically investors should only consider owning gold because of the possibility the masses of people could get emotional about it and the masses would overpay for gold during a bubble in it, but people should not view it as a rational investment. The fundamental contingent problem of modern times is that there is way too much unprecedented global debt and a global soft economy in the EU and Japan, thus a global Japan-style soft deflation (ongoing for 28 years) is more likely than a 1970’s rerun of high inflation and rising gold prices (that lasted 10 to 15 years).
Investors need independent financial advice about the risks of being fooled by gold.