Cons via Flyovercountry

Every morning I hear on the radio about how gold is our only financial salvation. We hear evidence every day about the explosive results gold has brought to the investors who have shown the savvy to put their faith in this choice for their retirement, and general plans to build wealth for their future. Indeed, over the last 5 years, gold has done well. Before people accept the pleas of the gold selling crowd, and their paid media spokes people who get paid to lend their names to this investment strategy, please consider an alternate Point of view.

Jack and His Magic Beanstalk.

Any time you make the decision to invest part of your hard earned capital into an investment vehicle, do so with the knowledge of what it is you are investing in. We have all heard the tale of Jack, who traded his capital, in this case a goat, for some magic beans. His dad, quite correctly I might add, was somewhat miffed. Jack failed to do his due diligence to determine it there were actually any such thing as magic beans, and if indeed the stranger’s beans were good. He also failed to determine that if they were magic, if that magic would turn out to be a good thing. Later, when a giant climbed down the magic bean stalk, he ran amok and threatened the entire community, an event which Jack could have avoided through simple research into his investment. Such is the nature of any investment, it is crucial that you, and any professional you work with to discuss the nature of your chosen investment until you are both satisfied that you have a complete understanding of what you are investing in. Now, I know what you are thinking, how difficult could gold be, and you would be partially correct. I will be speaking to gold from an investment perspective, which is slightly different from what you may have been told previously.

Gold, has been used until very recently as the standard of currency for the entire world who used a central currency. (Remember that prior to colonization of the Western Hemisphere, nothing was used as a currency, barter was still being practiced.) You should also realize however, that gold’s role as the accepted standard for currency was completely arbitrary. The same holds true for silver. These metals were chosen because of their apparent rarity. The value of gold, from its earliest days has been an assigned one. It is also true, that over the years, actual usage for both gold and silver have been found. Yes gold is a tangible thing, but its value is determined only by faith and the perceptions of those negotiating for it.

Why Then Has Gold Shown Explosive Growth Over The Last Decade?

The performance of investments are determined by a variety of factors. One important thing I wish to impart to everyone is this though, the capital markets are not efficient places. Like any human endeavor, fear and greed also play a role. We experience an economic crisis in this country every 5 years. While each one is unique in some way, they are also all the same in several important aspects. One of those aspects is that they all have a beginning, take on a life of their own, are great fodder for the media, and eventually come to an end. Precious metals have the virtue of being precious. That is to say, the amount of gold in the world at large is not going to be seriously increased thereby changing its assigned value in any appreciable way. Gold’s supporters are very quick to point out that it is a tangible asset, which will not disappear nor be eroded by inflationary pressures. In as much as those statements have been made, and while it maintains its status, even if it is no longer true, as the standard backing the world’s economies, then gold indeed will not be subject to inflationary pressures nor will its value erode. At the same time though, be very careful to separate real growth from an increase in relative value.

What Is The Difference Between Real And Perceived Growth?

When you buy a gold ingot, and you place it under your pillow, at no time in the future will you have a second ingot of gold with it, unless of course you have purchased a second one. That gold is not going to grow. No amount of prayer, alchemy, wizardry, or any other thing in this wold will cause your gold to have babies. Your gold will also not have a yield, such as is the case with fixed investments. Your gold will never, during the time that you own it, write you a single check for a dividend paid or interest earned. The increase in value of the gold is only caused by the following factors, its abundance in relation to the amount of currency available, and its perceived value assigned by the people in society. If people are afraid or apprehensive about the state of their currency, then the price of gold, historically has been bid up, and been bid up rapidly. Such is the case in today’s world. Our elected geniuses in Washington have decided to purposefully inflate the economy. As a default, any tangible substance in the world today has increased in relative value accordingly. Gold is no exception to that rule. Gold and Silver however have also been the beneficiaries of people’s fears. People are afraid of further erosion of their currencies value, and therefore are buying more gold and silver than even the current inflationary pressures would dictate. In effect, it is a bet that this will all get worse before it gets better. The problem for gold buyers is that this very phenomenon is the very definition of a bubble. The second gold took off faster than the current rate of inflation, its current price became a bubble. One of the things that is the same in every economic crisis, is that all bubbles eventually burst. The only question is who will be left holding the gum wrapper when this happens.

What Is Your Sell Discipline?

This is the single most important question which can be asked of any investment counselor or private investor. What market signals are you going to use to help you to avoid being left holding the bag on when the inevitable happens. Elevators go up, and they also come back down. I once asked someone to consider this when in a competitive situation, and then warned the prospective client to demand a more substantive answer then the cliche buy low and sell high. gold is no different. There are a lot of commercials out there telling you that you should buy gold, and they are using the old tactic of fear to do it. My question, when are they telling you to sell? This has happened to gold before, and at its peak in 1979 gold hit well above $800 an ounce. 8 Years of a Reagan Presidency, and gold fell to somewhere in the mid $200 range. In 2005 my father called me up and said, “what do you think of gold? It is on a 20 year high.” I explained what that meant. If you purchased gold at the tail end of the Carter Presidency, you would have broken even in terms of non comparative dollars by 2005. If you took inflation into account, you would never have broken even until the next time gold experienced a bubble. What this teaches us is this, you have to know when to get out. Over time, gold is going to pace perfectly with inflation, and this is its nature, and what it has been designed to do. It is also going to experience pricing bubbles which will make some buyers happy and others sad as they negotiate the murky waters of an inefficient market place.

Short Term Versus Long Term Thinking

People selling or extolling the virtues of a particular investment will often arbitrarily pick a time frame which puts their investment in the best possible light. When you start to listen for it on all of the commercials, it will make you laugh. My personal favorite are the guys hawking fixed annuities extolling their goods during the beginning days of a market correction. “Over the last 3 months, our index based annuity has outperformed the S & P 500 by x percent. Of course, since the annuity may carry at least a 20 year surrender period, a time frame of that length would probably be a much better place to discuss as an honest reference point. Yes, in the very recent past, gold has had a good run, but taken over the time frame of your expected working life, added with the time you expect to live in retirement, let’s say 50 years, how has it performed? How does that compare with other investment choices? Are there other alternative choices which have not been considered? In any investment strategy, I will include a percentage into what I would call non correlating asset classes. It usually is 5% to 8% of a portfolio. I am not usually adverse to including Precious Metals within this framework, but today, I say you have much better plays with your hard earned money. Commodities will help stave off inflationary erosion, have the benefit of being useful other than having an arbitrarily assigned value, and have not reached the status of huge bubble. If you insist on making your play gold, then at least keep yourself diversified, and only allow a small portion of your portfolio to be tied to this one asset class. Certainly no more than 10%.

-Flyovercountry

Pros via Yenta-Fada

These are large questions because they relate to much larger issues than just making a good return on your savings. They ultimately relate to the insolvency of individuals, banks, and entire governments. To condense this into a single post is impossible. At some point, people are being asked to trust their currencies. Obama represents the ‘full faith and credit’ of the U.S. government. Most people have very little money left over to invest at all. Bonds are nothing more than IOUs. Stocks are, imo, an insider’s game. Real estate has proven to be a risky investment. Where can people put their money knowing that they will get it back in a form that matches inflation? My only answer is ‘real’ money’. I do not tell you it is the only answer. I’m not qualified to do that and I would not take the responsibility for your money. I do know that government stats are lies. Financial outlets have agendas of their own. I trust a form of money that was used for payment for at least two thousand years.

Here’s an interview which discusses much more than I know about an actual gold standard and monetary policy.

I probably love my job so much, because analysing gold is basically about analysing EVERYTHING: monetary, economic, socio-economic, historical, technical, fundamental and political aspects. In my reports I try to get a picture from all of this different aspects, that’s what makes it interesting for me.

Okay, then let us go down to the nitty-gritty related to the world of gold. Are we experiencing these days the first indications of the re-monetarization of gold? And what is your attitude towards gold as legal tender?

Ronald Stoeferle: Yes, I think there is a big paradigm shift going on right now. The thought of a currency not pegged to gold would have probably been absurd 100 years ago. That’s how illusory a gold standard sounds to us today. However, 20 years ago mobile telephones with internet connection, digital cameras, and a digital music collection were equally illusory. And we are in a similar situation with regard to the gold standard today. Today even the thought that back in 1971 every 35 US dollars were backed by one ounce of gold is absurd.

It had formerly been up to a handful of critical minds to question our monetary system, high-profile politicians and central bankers have meanwhile offered their opinion, too. Last year we saw numerous signals that indicated the fact that gold was gradually becoming “politically correct”. Robert Zoellick, President of the World Bank and former member of the Bush cabinet, had this to say about the gold standard:

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. The development of a monetary system to succeed ‘Bretton Woods II,’ launched in 1971, will take time. But we need to begin.”

Such statements would have been unthinkable only a few years ago! Since the mid-1970s hardly any high-ranking US politician has mentioned the gold standard in a positive context. This confirms the broad paradigm shift we are currently going through. Unfortunately many people interpreted the World Bank President’s statements wrongly, and he was immediately discredited. He did not argue in favour of an explicit return to the gold standard, but he commended its stability. On top of that he just wanted to launch a discussion and critically question our monetary system.

We assume that Zoellick is thinking of a basket of goods that among other goods contains gold. Thomas Hoenig, President of the Federal Reserve Bank of Kansas City also called the gold standard a “legitimate monetary system”. Moreover, Prof. Robert Mundell – the “Father of the Euro” – urged gold convertibility for the euro and the dollar (i). Steve Forbes, publisher and former Republican presidential candidate, was also optimistic that the USA could return to a gold standard because of its fiscal imbalances.

Therefore I think that the foundation of a return to “sound money” seems to have been laid. We believe that a return to the gold standard is no major economic or organisational problem. Rather, what we have on our hands is a highly political and philosophical question of principle that has to be answered. We therefore believe that the strain has to become much bigger still before specific action will be taken. Who knows, but perhaps we will see a future where rather than asking for the price of gold, people will much more often ask for the price in gold.

Bill Buckler from the Australian newsletter “The Privateer”

According to the official figures put out by the US government, the economic “recovery” in the US celebrated its second anniversary on June 30, 2011. The “fuel” burned in this “recovery” is immense. Mr Obama’s presidency has ushered in the era of $US 1 TRILLION plus annual deficits riding on top of 0.00 percent controlling interest rates from the Fed. It has also ushered in the era in which almost nothing istraded on the paper markets which is not – explicitly or implicitly – guaranteed by the government.

The fuel to keep the global financial system functioning does not stop at the borders of the US. The “Dodd-Frank Wall Street Reform and Consumer Protection Act” has just produced the first ever “audit” of the US central bank. It reveals that in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this – a total of $US 7.75 TRILLION – was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this “audit”), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that.

This inflationary explosion is unprecedented in any era. It represents the biggest ever effort to rescue a debt-based system from the ravages caused by its own debt issuing excesses. It has, at best, provided a “remission” for global paper markets. The cost has been devastating for REAL economies everywhere.

A cancer patient who goes under the knife gets the malignant disease physically removed. If all traces of the malignancy are removed, the patient will recover. If all goes well, the recovery will be permanent with no “remissions”. A life-threatening malignancy is NOT fought or cured by doing everything possible to increase its power and potency. Yet that is what financial authorities in the US and everywhere else have been doing in regard to the life blood of their economies. As this stark fact becomes ever clearer, Washington DC and Wall Street stand helpless before the fact that they can only cure the economy at the cost of killing the financial system which is feeding on it. It’s that simple.

-Yenta-Fada