Dylan Grice has taken a firm stand in favor of gold in the most recent edition of the Edelweiss Journal, but it doesn’t really have to do with current valuations and it certainly isn’t related to short-term gains. Grice recommends gold because he is bearish on the entire system of world finance.
Dylan Grice says people hate gold
“It’s not so much that people don’t like gold anymore—it’s that they hate it. Of course, this makes gold more interesting than it has been in many years. There is blood on the streets,” says Grice. “So against our better judgment, despite the trepidation one feels before discussing gold, and mindful that the last thing the world needs is another opinion on gold, we nevertheless venture our own.”
Grice explains that the book of the moment at his office is Nassim Taleb’s Antifragile, and he explains the recent crisis, and the financial crises before it, in those terms. The book argues that Black Swan events occur much more often than you would expect because the theories we use to make decisions are so often flawed. We think that a specific course of events can’t happen, so we base all of our decisions on that impossibility, and the whole system comes down because out initial assumption was wrong.
The Phillip's Curve
Grice gives the specific example of the Phillip’s Curve, an economic theory that was generally accepted in the 1970s that specified a precise relationship between inflation and unemployment. When unemployment started to rise, policymakers boosted inflation to bring it back down, leading to a painful double-dip recession. The problem, of course, was that Phillip’s Curve didn’t reflect reality, and the policymakers made a bad situation worse.
“Theories are dangerous things,” says Grice. “Today’s bizarre confluence of negative real interest rates, money printing, Eurozone sovereign default, aberrant asset prices, high unemployment, political polarization, growing distrust... none of it was supposed to happen.”
Grice sees rising external debt, ‘naïve intervention’ and no sign that governments are going to get serious about bringing debt under control any time soon.
Which is the real reason Grice is so positive on gold. He sees central banks and investors destroying value, and he thinks now is the time to preserve wealth with gold as the system falls down around us. While most analysts see clear sign of recovery and a world economy poised for growth, Grice sees a lot of people kidding themselves, and expects the next financial crisis to be even worse than the one we just went through.
“Today, we see the intrinsic value of gold. And although we can’t know when, we think others will soon be forced to too.”