Looks like the WSJ is trying to talk people out of gold

Posted by Jason | Posted in Miscellaneous | Posted on 28-05-2010


Obviously, since the meltdown of the past few  years, gold has been in a huge bear market. I have questioned on this blog before if it’s the next bubble. I do think there is a chance it is, but I don’t doubt it’s long term up trend. The problem with critics of gold though is they are talking about gold as if you are buying a stock and hoping to crank out 20% returns per year. Here is a recent article from the Wall Street Journal along these lines.

This is a very sad day for me.

In Part One of this series, when I argued that gold might be about to go vertical, I made a whole bunch of new friends among the gold bugs.

And now I’m going to lose them all.

That’s because even though I think gold might be about to take off, I don’t recommend you rush out and put all your money into gold bars or exchange-traded funds that hold bullion.

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous.

Of course you shouldn’t rush off and put all your money in gold bars. You shouldn’t do this with stocks either, but for some reason, I don’t think the author would be so anti-stock as he is about gold.

Warren Buffett put it well. “Gold gets dug out of the ground in Africa, or someplace,” he said. “Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

No utility? Have you seen wrap videos. OK, I’m just kidding. Anyways, who says it has no utility? Gold is used plenty.

Many things can be classified as having no utility. The Mona Lisa has no more utility than a gold sculpture. Utility can be very subjective, but one thing we know for sure. People have always demanded gold, and it’s not going to change any time soon.

And that’s not the half of it.

Gold is volatile. It’s hard to value. It generates no income.

Unlike our very stable stock market, that just went below it’s year 2000 levels again!

Yes, it’s a “hard asset,” but so are lots of other things—like land, bags of rice, even bottled water.

Yes, and people invest in all those. What’s the point?

It’s a currency “substitute,” but it’s useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking “facility” still trying to settle their debts with cigarettes. That’s gold. It doesn’t make sense.

Is this guy serious? It’s a currency substitute for a reason. It can’t be replicated by turning on a printing press. Also, is any fiat currency useful? It’s only useful for robbing people without them knowing it.

As for being a “store of value,” anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.

Now this is just silly. People bought it during double digit inflation to protect their value. The government, in order to correct it’s horrible policies, decided to raise the interest rate and bring the inflation down. That drove the price down. People didn’t have to worry as much about their currency being devalued, so demand for gold went down. Of course the guy goes back to the 70s and then only goes 20 years. He didn’t want to get into the years where gold has sky rocked. That would mess up his narrative.

I get worried when I see people plunging heavily into gold at $1,200 an ounce. What if the price goes back to where it was just a few years ago, at $500 or $600 an ounce? Will you buy more? Sell?

My concerns about gold go even further than that.

Let’s step inside the gold market for a moment.

Everyone knows the price has risen about fivefold in the past decade. But this is not due to some mystical truth or magical act of levitation. It is simply because there have been more buyers than sellers.

Ah, he understands supply and demand and it’s effect on prices.

Banal, but true—and sometimes worth repeating.

If the price rises you’d think there must be a shortage. But data provided by the World Gold Council, an industry body, tell a remarkable story.

Over that period the world has produced—or, more accurately, recovered—far more gold than anyone actually wanted to use. Since 2002, for example, total demand for gold from goldsmiths and jewelers, and dentists, and general industry, has come to about 22,500 tonnes.

But during the same period, more than 29,000 tonnes has come on to the market.

The surplus alone is enough to produce about 220 million one-ounce gold American Buffalo coins. That’s in eight years.

Again, he’s going back to utility as if the gold has to be used to make something. He didn’t include currency in there. People are demanding it as a protection against monetary policies that governments are using to monetize their debts, stimulate their economies, etc.

Most of the new supply has come from mine production. Some, though a dwindling amount, has come from central banks. And a growing amount has come from recycling—old jewelry and the like being melted down for scrap. (This is a perennial issue with gold. I never understand why the fans think gold’s incredible durability—it doesn’t waste or corrode—is bullish for the market. It’s bearish.) So if supply has consistently exceeded user demand, how come the price of gold has still been rising?

In a word, hoarding.

Gold investors, or hoarders, have made up all the difference. They are the only reason total “demand” has exceeded supply.

Hoarding? Is that what people do with their savings account? Is that what you kids do with baseball cards? People hoard scarce items, because they go up in value. Hoarding is a good thing.

Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on.

I’d have to disagree. I think looking at how unstable governments are, seeing the US dollar losing its reserve currency status, and watching a central bank print money like they’re manufacturing monopoly game boards is driving people to buy gold to protect the value of their current wealth.

What do we call an investment scheme where current members’ returns depend entirely on new money brought in by new members?

A Ponzi scheme.

OK, this guy is seriously crossing straight over to the nutball side of an argument. This is no different than stocks. It doesn’t matter how much money a company makes, if there is no new money brought in by “new members”, then the value of the stock will decline.  I can’t believe this guy writes for the Wall Street Journal.

Yes, as I wrote earlier, gold may well be the next big bubble. And that may mean there is big money to be made in speculation.

But I don’t trust it as an investment.

How can you square this golden circle? I’ll tell you in Part Three.

via ROI: Why I Don’t Trust Gold – WSJ.com.

As I’ve said, this author is making statements about gold as if everyone is wanting to buy it strictly for investment. Intelligent investors are investing to protect their wealth. Speculators who invest because Glenn Beck tells them to or because they think they are going to hit the jack pot because of some commercial aren’t going to properly invest no matter what some person in the Wall Street Journal says.

As far as if Gold is going to plummet. Gold is only going down when the dollar strengthens, and I’m not sure if the author has seen the news lately. There is no sign of that to come.

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