While it was all the rage a few years ago, where is gold now? Nobody mentions it because it’s way down in value. Why? Well, people want to own gold when they think the government stops caring about the purchasing power of currency. When budget deficits get big, people worry about failed bond auctions, and the Fed is the buyer of last resort.
In the U.S., gold peaked during the Fed’s Quantitative Easing program. Back then we had a $1.8 trillion annual budget deficit and bond auctions were scary. Hence, gold became quite popular.
But today those deficits are considerably smaller. We can thank economic growth, more aggressive debt collection and higher taxes. Perhaps not coincidentally, gold decreased in value as those deficits shrank.
If nothing more, it’s an interesting observation. The logic behind the budget/gold connection makes sense from a human and emotional standpoint. Gold’s rarity and inherent value can provide comfort if you think things are really going to tank.
If you’re considering an investment in gold, my advice would be to ask yourself if you think deficits will increase or decrease in the future. If you think we’ll have more of them, then you may want gold in your portfolio.