The Case Against the Case Against Gold

So says Dr.Duru (http://drduru.com/onetwentytwo/) in edited excerpts from his original article* on Seeking Alpha entitled The Case Against The Case Against Gold.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Duru goes on to say, in part:

First of all, the title is a bit strange. [The entire article can be read here along with another critique by Doug Eberhardt.] It implies that the author thinks that markets do exist where a good case can be made for gold. In fact, the author notes that “historically, gold has been known as an effective store of value.” I would have thought such a statement would end the entire debate. Instead of course there are caveats: “…but this has gone in and out of favor…The only thing that has intrinsically changed is the perception of what the future might bring.”

The last time I checked, bonds fall in and out of favor as well, with valuations fluctuating along with perceptions about the future. Secular and cyclical rallies, dips, and crashes are innate features of the markets we use to trade assets. Arguing that gold has a different degree of troughs and heights does not put it in a class alone.

Who in the world is currently reading this article along with you? Click here

The rest of the article is full of these kinds of false differences (some repetitive). I use a problem vs. solution/comment format to highlight most of my remaining rebuttal.

Zack’s Problem #1: “Typically, when people fear the causes of inflation, currency debasement or other potential economic downfalls, many feel it is a good time to invest in gold. Not me.”

My Comment: I specifically like gold as a hedge against the devaluation of the currency. The author’s comments establish his position as anti-gold, but left me wondering whether this is a time when he would recommend buying gold.

 

Zack’s Problem #2: “I don’t see gold as a financial asset. Gold doesn’t generate any income, and it doesn’t pay a dividend. Thus I view it not as an investment but as a speculation.”

My Solution: For dividends, an investor can buy stock in a gold miner. My favorite gold miner, Goldcorp Inc. currently pays 1.2%. This may seem like trading 6 for a half dozen. However, if I look at Goldcorp’s gold as simply a product that gets bought and sold according to the supplies and demands of the market, then fundamentalists can analyze it just as well as any company. Very few companies sell products that last for generations. Gold has outlasted civilizations.

 

Zack’s Problem #3: “Gold’s value completely depends on other people to act in a specific manner for it to go up in price.”

My Comment: People make markets. People must respond to bearish and bullish arguments to make any price move. Gold is no different. Stocks also depend on other people to act in a specific manner for it to go up in price. Other people must believe in the fundamentals, the technicals, and/or the theme to buy the stock. I see no difference between that and gold.

 

Zack’s Problem #4: “Right now, countries around the world are trying to devalue their currency in order to improve exports and fight high unemployment. To some degree, real assets like gold should increase in price, but this idea is wholly dependent on people responding in a specific way to its inherent value, even when there’s no fundamental reason to do so…The high price of gold is completely reliant on people’s preferences. If those preferences change, the price of gold could fall dramatically.”

My Comment: This argument almost seems to contradict itself. This debasement has a potential impact on price levels throughout the economy, so it is enough of a fundamental reason to consider gold. Given gold’s relatively fixed supply, its value in paper currency fundamentally increases with the amount of paper that spreads across the land.

The author surprisingly admits that gold is “a real asset,” but seems reluctant to accept that these debasements are a fundamental prop for price levels (including stocks!). Just like stocks, bonds, and land, people must respond in a specific way for value to get created: believe in the story of future earnings and cash flows, believe in the solvency of a company or country, believe that more and more people will find the location of your property attractive, etc. … If people’s preferences for the multiples paid for earnings, for risk tolerances, or for location change, then, yes, even these assets will change in value.

 

Zack’s Problem #5: “Gold is something you can hold in your hand and it looks very pretty. Buying gold is very much like buying an antique or an expensive piece of artwork.”

My Solution: As they say, “don’t hate me because I’m beautiful.” Buying gold is indeed like an antique or piece of art…except that no one uses those items as currency. The government can of course declare they have monetary value and enforce that value, but that is a flaw of any manufactured item trying to pass itself as currency, especially for pieces of paper. Gold requires no such permission. I think that gold’s utility as jewelry is an added bonus to its appeal, not a detraction.

 

Zack’s Problem #6: “My experience in investing has taught me that the asset class that is the hardest to own tends to perform the best. The one that’s easiest, the one everyone is rushing towards, tends not to do as well.”

My Comment: Gold is NOT so easy to own, specifically because there are so many bears out there who are eager to see it crash. Central banks pretend to hate it even as they pile it up in reserves. The easy thing to own is paper currency. Our employers pay us with paper currency every day. With the S&P 500 at 5-year highs and bond prices at historic highs (yields at historic lows), are these assets easy to own now or hard to own? According to the logic of “anything that goes up must be too expensive,” one might be tempted to dump stocks and bonds here…but of course that is not the advice given in this piece.

 

Zack’s Problem #7: “The same way trees don’t continually grow up into the sky, the price of gold will not continue to rise indefinitely.”

My Comment: This is a strange argument against gold when gold has indeed continued to rise over the long-term, generations even. I sure hope no one buys stocks and bonds because of a belief in their ability to rise indefinitely.

 

Zack’s Problem #8: “Historically, when the price of gold crashes, it crashes fast.”

My Comment: Yes, exclude the modern day crashes in 1987, 1998, 2000, 2008, 2009, and stocks never crash fast. If gold ever crashes again, I will thank my lucky stars that I can grab it again so cheap. I sure did not buy enough back in 2008.

 

Zack’s Problem #9: “In short, gold prices are being driven by ‘animal spirits,’ not any sort of evaluation of its intrinsic value.”

My Solution: If a notion of intrinsic value helps you sleep better at night, I suggest reading “Justifying Gold Prices From A Money Creation Perspective.” It is a great reminder of why gold is “so high.” The article also suggests, rightly so, that gold remains undervalued and under-appreciated.

 

Zack’s Problem #10: “…recognize gold as something other than an investment – it is a speculation.”

My Response: Call it what you want, as long as gold is a store of value and a monetary unit, I am good with it.

 

Zack’s Problem #11: “When everyone who has been parking their assets in gold decides it would be more productive to go into equities or other investments, the price of gold will reverse itself. Once people decide they want to stop buying the pretty rock, the price of gold will fall.”

My Response: This argument is a tautology. It even applies to bonds: ‘When everyone who has been parking their assets in bonds decides it would more productive to go into equities or other investments, the price of bonds will reverse themselves.’ Yet, even though this argument is true, no one would use it as a principle for avoiding bonds as an investment.

 

Zack’s Problem #12: “What is driving the price of gold is not fundamentals, not income streams, but fluctuations and perceptions about expectations. It’s essentially a speculation on mass psychology, and that, quite simply, cannot be predicted.”

My Response: Actually, the Federal Reserve has now made its printing rules very predictable, so I will be daring and predict gold will tend to go higher as this printing machine revs up. If the economy, GDP, stocks, and bonds were so predictable, we would all be millionaires by now.

HAVE YOU SIGNED UP YET?

Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.

It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.

Join the informed! 100,000 articles are read every month at munKNEE.com.

All articles are posted in edited form for the sake of clarity and brevity to ensure a fast and easy read.

Get newly posted articles delivered automatically to your inbox.

Sign up here.

The Current Gold Setup

I conclude by looking at the current setup for gold. The breakout from August 31st is well intact. While I did not interpret this year’s Jackson Hole confab as a guarantee for QE3 in September, clearly a lot of people did. Gold was the first mover with stocks waiting a full week before experiencing its own breakout (to new 52-week and near 5-year highs).

(click to enlarge)

Gold’s wild ride since the last peak. Source: FreeStockCharts.com

Just as stocks have stalled out at highs of the year, gold has stalled at its high for the year. I consider this point a rest stop for gold. Be careful out there!

*http://seekingalpha.com/article/918981-the-case-against-the-case-against-gold

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. My Case Against the Case Against The Case Against Gold

All thing considered, it seems clear that the long-term real returns of gold have been poor (compared to stocks and bonds), and I see no reason to expect long-term price appreciation for gold to be above inflation. In fact, as with any non-income producing asset, it would be unreasonable to expect gold to provide significant positive real returns over an indefinite period of time…I would argue that buying gold is a short-term gamble that is completely dependent on the unpredictable vagaries of perception, market psychology and the “greater fool” theory…While it is true that gold can be a good short-term trade and offer superior returns over shorter periods (as has been the case in recent years) I believe that stocks will continue to substantially outperform gold over time.  [Let me explain these less than popular conclusions further.] Words: 1258

2. Why Is There Such An Interest In Gold?

Is gold a commodity or currency? How does it behave as an investment? What are the fundamentals of investing in gold? What are the different ways investors can get exposure to gold in their portfolios? The answers to these questions and many others are answered in this latest infographic from Visual Capitalist.

3. James Turk: Why Gold is Preferred to National Currencies

Some say that the gold price rises and falls, but they are grabbing the wrong end of the stick. It is the purchasing power of national currencies that rise and fall. Here is an analogy to make this point clear. When standing in a boat and looking at the shore, it is the boat (currencies) – and not the land (gold) – that is bobbing up and down. [Let me explain the value of gold further.] Words: 631

4. The Single Best Reason to Own Gold Is…

Today all currencies are fiat, that is, they are money only by government edict, by the law; they have no inherent value and are not backed by reserves. Because of this central bankers around the world can create/ print new money almost without limit, and as with all markets currency prices are set by the law of supply and demand, and as more dollars, euros, pounds and yen are created, their value falls. [Let me explain the ramifications of such action.] Words: 785

5. GOLDRUNNER- INVESTORS BEWARE! PART I- PRICE AND VALUE DIVERGE WITH AGGRESSIVE DOLLAR PRINTING

Several years, ago, the very savvy Richard Russell stated that the investment times were changing.  He said that with huge debts everywhere, cash flow would be the most important issue for everybody going forward- for business, for investment, and for everyday life.  He said that it was no longer a game of “Return on Capital”, but a need for “Return of Capital.”  What Richard was saying was that good and consistent investment and income gains would be more difficult for a decade, or so, and that just keeping the same value of one’s savings would be an important goal.

6. GOLDRUNNER: INVESTORS BEWARE! PART II PRICE AND VALUE DIVERGE WITH AGGRESSIVE DOLLAR PRINTING

The concept of “value” is extremely important, especially when Dollars are being printed aggressively.  This is because the value of your Dollars is falling.  Most people look at a Dollar and see a Dollar.  They don’t understand that the worth of a Dollar can fall dramatically in times like today.

7. My Rationale For Owning Gold