2/2/2018
Forget bitcoin, give me old-fashioned gold as an inflation hedge
It’s pretty, it’s useful and you don’t need a password to access it
MERRYN SOMERSET WEBB
© Bloomberg
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Merryn Somerset Webb
Over the past year or so, there has been no overall cut to Japanese domestic productive capacity — except in some thoroughly outdated sectors and a few in which Japan has no hope of ever regaining a competitive advantage, such as coal or textiles.
You will think this one of the most boring sentences ever offered to you by this column. But bear with me.
It is actually one of the best clues you will find as to what might happen next in the global economy. For years now, the world has suffered from an overcapacity and disinflationary problem. Too many factories produce too much stuff, pushing down prices for that stuff too far as a result.
You see the consequences of this all around you in low wage growth and endless quantitative easing. There is a general assumption that this hasn’t changed and is not changing, so there is no risk of inflation rising from its clearly cooling ashes, regardless of how loose monetary policy is and for how long.
This assumption might be completely wrong. Look at how the world ended up with too much capacity in the first place. It was (as is almost everything) all about China. The accession of this huge economy into the World Trade Organization in 2001, the priorities of its leaders over the past couple of decades (growth, growth, growth) and the particularly huge dose of stimulus chucked into the economy in 2009 added massive, cheap capacity into the global system and changed everything for everyone else.
Who wants expensive stuff made in Michigan or Aichi Prefecture when you can have cheap stuff made in China instead? Quite. But China’s changing. For years, party officials have been incentivised to force growth out of their regions, regardless of the effects on prices, global macroeconomics or, for that matter, pollution. But in the party conference in October, Xi Jinping shifted emphasis.
Instead of focusing on growth, China’s leader talked of “three tough battles”: against preventing major risks (mainly financial — the new target is to be “further deleveraging”); poverty (Xi fancies a “moderately prosperous society” in all respects); and pollution (he wants to see the sky blue again).
The result has been pretty instant. Almost as the delegates headed home, say the analysts at Gavekal, prices of natural gas (a “clean fuel”) doubled; steel output stalled; and cement sector output actually fell even as demand for it and hence prices rose. China doesn’t seem to be adding new capacity to the global economy in the way that it was and that should mean it isn’t exporting deflation to the rest of the world any more either.
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That is a dynamic that is arguably beginning to show up everywhere else. The slack is disappearing. There is no spare capacity left in Japan (or you would see new cuts to it). Industrial production in the US hit a record high in December, despite the US being too busy with buybacks and financial engineering over the past decade to build new capacity. Manufacturing output in the UK is at its highest in 10 years.
This could all lead us to several interesting conclusions. The first, highlighted by Gavekal, is that it is an explanation for the way stock markets in countries that have been hampered with too much productive space in the past are suddenly breaking out. See China, Japan and Korea — markets you might want to stick with for a bit.
The second is that, guess what, the boom in the US might not be entirely down to Donald Trump’s policies. The factories could be humming because global capacity constraints are being hit rather than because he’s the best economic manager ever. And the third is that the real inflation our great leaders (the central banks) think is impossible however much they might print, isn’t impossible at all.
It is early days to be too sure about this. There could be more capacity than is immediately obvious and the global economy remains relatively fragile. However, the insanely tight labour market in Japan and the historically low unemployment rates in the US and the UK do rather back up the idea that excess capacity is yesterday’s story. And it’s hard to pretend that a little inflation isn’t creeping back into the numbers almost everywhere: the UK’s Retail Prices Index is now sitting at 4.1 per cent (which presumably is why Mark Carney is very keen indeed that we are aware that it has “known errors” in its calculation).
None of this is a certainty — far from it. But if inflation might be coming back or even if there is just enough data out there to provide markets with a whopping inflation scare, you will need to be ready. The central banks probably won’t be.
So how can you hedge yourself? My usual answer to that is gold. But there’s a group of people who tell me they have a better answer for me. Let’s call them bitbugs.
Bitcoin, they say, can’t lose its purchasing power as a result of inflation (thanks to its apparently limited supply). It doesn’t rely on governments for its value. It’s transferable, liquid and private — the perfect defence against the inflationary bias endlessly created by dim-witted central bankers. It is, as one bitbug told me on Twitter last week, way better than gold as a hedge against governments and inflation: “Gold is old.”
If I can dig out the tweet, I will be referring my sneerer to Mr Carney. While he doesn’t like inflation measures that tell him what he doesn’t want to hear, he really, really doesn’t like the anonymous nature of bitcoin. “One doesn’t have anonymity for bank account transactions,” he says, “why would you for cryptocurrency transactions?”
Gold has a few things going for it that cryptocurrencies don’t. The G20 doesn’t waste much time these days talking about how to regulate people’s gold holdings
Merryn Somerset Webb
Why indeed? I mention this to make the point that cryptocurrencies are only transferable, liquid and private for as long as regulators allow them to be. You could say the same of gold, of course. Owning all but a small amount of gold coin was temporarily made illegal in the US in 1933.
But gold has a few things going for it that cryptocurrencies don’t. The G20 doesn’t waste much time these days talking about how to regulate people’s gold holdings (Mr Carney says regulating cryptos is top of the list). It is universally accepted as a global and long-term store of value and one that doesn’t demand a password when you want to dig it out from under your bed. It’s pretty; it’s useful; it’s really hard to fake; it’s easy to change into a fractional currency; and, crucially, it has history. An ounce of gold has, give or take, hung on to its purchasing power for thousands of years.
I’d be surprised if anyone was saying that about bitcoin in 4018. I hold gold as a hedge against shocks and in particular against inflation, precisely because gold is old.
Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal. merryn@ft.com. Twitter: @MerrynSW
