Gold - Not the Safe Haven People Think it Is 33 comments
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Back in the old days, every good financial planner worth their salt would have recommended that a truly diversified investment portfolio contain at least 10%-15% of gold or gold stocks. This would have included a portion in real estate (not REITs), stocks and bonds.
Generally speaking, there are different reasons why a person would hold each type of asset. Stocks would be held for "long-term" capital appreciation. Bonds would be held for income and real estate would be the inflation hedge. Gold on the other hand would be held if the government couldn't pay its debts. You would never really want to be in the position of having to cash in on your gold position for obvious reasons. Instead, gold would be something that you pass on to your heirs as a just-in-case insurance policy.
I consider myself a precious metal investor of the most basic type. I do have 15% of my portfolio in gold and silver but I don't invest in gold and silver stocks. I consider precious metal stocks perpetual call options on the price of gold or silver. Therefore, I only speculate in the top gold and silver stocks, Barrick (ABX), Newmont (NEM), Agnico Eagle (AEM), Hecla Mining (HL), Silver Standard (SSRI) and Coeur D'Alene (CDE), when I see that the opportunity exists or that an "unimpeded" precious metal bull market is in place. Otherwise I stay out of precious metal equities.
Why do I stay out of gold equities except for the occasional speculative urges? As indicated in my previous articles on silver, dated November 25th, and gold, dated November 17th, there are market factors to consider before committing money to such a volatile portion of my investment portfolio that is dependent on both the price of gold going up and the general stock market not going down.
What confuses me about "gold bugs," as opposed to gold investors, is that as well informed as they are, gold bugs will not acquiesce to the idea that, generally, gold and silver stocks don't, can't and won't go up during a general stock market decline of 10% or more. Some gold bugs are willing to reference periods like 1929-1932 as a rationale for why gold is a necessary hedge during a stock market collapse. To respond to such spurious claims from the gold bugs, I have included the price history of gold and silver stocks from 1924 to 1933. This data is from Poor's, the company that pre-dated the merger of Standard and Poor's.
click to enlarge
The price data of the 21 precious metal stocks is resounding since it puts to rest the idea that a decline in the general stock market would result in an increase in the price of gold and gold stocks. Even with the price of gold being fixed at a $20.67 per ounce, investors were not overwhelmed by the idea of jumping into gold stocks as the highest quality blue-chip stocks crashed 89% from 1929 to 1932.
Notice that some gold stocks ran up in price and peaked before 1929. For the remaining stocks that did peak in 1929, take a look at the high and then the low in 1930. All of these stocks fell by at least 50% during this two year period. Some stocks would stabilize, while the majority would collapse until 1931 or 1932. Once hitting their bottom in 1931 or 1932, the stocks would then recover, along with the rest of the stock market. The only gold stock from this era that still trades on the New York Stock Exchange is Newmont Mining. Newmont went from the hefty price of $236 in 1929 to $4.63 in 1932. After 1932, all stocks started moving much higher regardless of the industry group the company was in.
The lone glaring exception to this survey is Homestake Mining. I would have loved to have bought Homestake in 1924 at $35 and never have to watch it fall back to where I got in. However, Homestake is a special situation that is completely unrelated to the general conditions of the market. Homestake Mining has become the rallying cry for gold bugs despite the fact that there are numerous special situations that can be pointed out in other industries during the same timeframe. Homestake Mining will be the subject of future postings on this blog for an understanding of the reason(s) why it went up in price in the face of a crashing stock market.
The only reason that gold was a place where money flooded in periods of panic (1807, 1819, 1826, 1837, 1842, 1861, 1865, 1876, 1884, 1893, 1904, 1907, 1932) was because of government price fixing. If I lived through a panic during any of the prior periods and found that everything was falling in value but the official price of gold was being propped by the government then, of course, I would seek safety in gold. However, without a gold standard, the price of gold has proven to be at the whims of the market as a commodity. Unfortunately, gold bugs have mistaken gold as a safe haven during a panic for the wrong reason. This explains why James Dines, the world’s most renowned gold bug, openly wondered in his October 31st newsletter, “…why aren’t the prices of gold and silver commodities higher…”
Again, when the general stock market declines 10% or more then gold and silver will likely fall as well and may actually lead the decline on a percentage basis. The purpose of these articles on gold and silver is ensure that the money invested is done with an understanding of the forces in play. Gold bugs, understanding the dire nature of the government's fiscal and monetary position, might not be taking an investment position in gold but protection against the government recklessness. For everyone else, gold and silver are true commodities and should be treated as such.
The long term trend in gold and silver stocks as demonstrated by the Philadelphia Gold Stock Index [XAU], which was initiated in November 2000, will eventually head permanently higher. The continuation of that trend will be among the key indicators that the bear market in stocks is at or near an end.
Sources:
Dines, James. The Dines Letter. October 31, 2008. page 4.
Poor's Publishing Company. Poor's High and Low Prices 1924-1934, 1934 Edition. 1934.
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This article has 33 comments:
Dines, in large part, doesn't think gold/silver prices are going higher because of short selling of the metals rather than their loss as hedges against trouble.
Interesting take on the depression...stocks recovered and then went into a very long renewed tailspin after Roosevelts election..I'd hardly say all stocks, regardless of industry, prospered..very few did.
You certainly have courage commending CDE to your elite silver stocks (some gold)..that is indeed a small group.
More glaring, however, is the notion that gold/silver do anything but protect against monetary debasement..when paper money has had a dependable champion gold has backstopped it and been convertible (pound..dollar..etc)..... there is no strong currency of universal distribution (paultaut might learn something here...) such as the late 1970's and today gold stands as a bulwark...
As of NOW there is NOT a single currency in the world of any note that is not rapidly reliquifying (inflating) its monetary base..gold simply makes sense.
Precious metals have every potential of holding strong because they hold no risk of default. I say potential, and I think the gold bugs are generally overconfident and for poor reasons. But it's neither clever nor wise to ignore fundamentals, which are in this case, a world bloated with endemic risk.
China is not rapidly reliquifying its monetary base.
You almost make sense in this post Gee oh. Too bad you keep distorting history to serve your opinions.
When the the dollar was officially taken off the Gold Standard in 1971, the price was $35 oz., Gold rose even though inflation was lower than it is now. The Markets were repricing it to reflect the inflation of the previous 70 years( the US was on the Gold standard with Gold fixed at $20.67). Had the Major Reserve Currency still been the British Pound, as it was in 1900, it would have appreciated against it.
Gold did not start its rise because of the then current rate of inflation, it rose because it was no longer "fixed" at a certain price, it was catching up in value against the Reserve Currency at that time. Inflation only became a real problem after that idiot Nixon and his price fixing schemes: WIN, Whip Inflation Now.
There was only one currency which appreciated strongly in the late 1970s. The Japanese Yen which went from over 300 yen to the dollar to parity. Duh
You really don't have a clue. You are just making things up as you go along.
At least the Author supplemented his article with facts from the same source I just did, the Wikipedia.
If you are going to slam someone, get your facts straight.
IMHO
Another very useful site is Mineweb.com, I think you will be pleasantly surprised if you haven't been there already.
Take care.
Gold is the only true money left on the planet. It has been recognized as money since the beginning of time. Because there is such a limited supply unlike paper it is the only true holder of wealth. All Central Banks hold it in there vaults for a reason. USD has only been around for 200 years or so. It's fake and the "Fed" should be put in jail. Who are you going to trust? . When the dust clears all that is left is gold. It does not matter what the US says or does anymore. China and Russia are filling there vaults with gold for a reason. Gold may go up and gold may go down but I'll keep buying it. The big lie is starting to be exposed. This is a new event that can not be compared to history.
When you purchase physical gold, you pay enormous transaction and storage costs and risk loss or theft, but get the additional benefit of "anarchy protection" in the rare event that all counterparties and the currency fail. The values that the market assigns to these attributes changes on a minute-to-minute basis, which is why the price of gold is so volatile.
To be clear, gold's value, just like a currency's value, is purely psychological. There are lots of elements and compounds on the planet that are more rare or costly to produce that people do not assign the value they assign to gold. Gold's value as an inflation hedge or as anarchy insurance is based on the premise that its psychological value will endure. That may be a solid assumption, but be aware of it. Canned goods, water filtration devices, medicine, pesticides, fuel, or ammo might increase in value faster if things got truly desperate.
I would like to respond to when you said, "I wonder why you harp on this subject. I think it's very unhelpful of you since you're really not an expert in this area."
When I first produced my article on gold, respondents said I was taking "facts" and misconstruing them while at the same time lacking any kind of literary skills. I was challenged on my true understanding of gold and economics and the current monetary crisis. All this despite the fact that I have solid facts and source citations for anyone to dispute the claims that I make.
I wrote the second article as an attempt to answer the critics with further evidence on the topic of silver since the history on gold wasn't satifactory. When I provided that information, I was accused of not knowing what I was talking about and that I should crawl under the cardboard box that I came from. This despite the facts about the price of silver throughout history has not been hidden by government propping as with gold.
Finally, my third article was an attempt to answer my critics claims that "this time is different." This time is different because we're on the verge of a currency crisis or realignment a la 1929. I specfically gathered the data from the period of 1924 to 1933 to further illuminated the situation on gold and silver stocks during a deflationary/currency crisis. I was as broad as I could be with my selections. In fact, I left out examples that were even more extreme than what I presented. Clearly I cannot satisfy the appetite of those not willing to take in the facts as they are.
Unfortunately GMiki, I cannot go to your blog to get the full breadth of your explanation of the reason gold is the place to be. However, I am fully aware of the good points that most gold bugs have issued; the problems in the economy as well as the currency situation. As a person who has held actual physical gold and silver since 1996, I can tell you that I, more than anyone else, have a vested interest in the price of gold and silver going up. In fact, I said that when gold turns so too does the general market. What's wrong with that possibility?
I have read and studied the markets on gold and silver for quite some time. I'm sure the classic retort to that last remark is that, "I need to go back and study history again 'cause I sure didn't learn anything." However, I only generated those articles to help gold and silver investors. If gold bugs will only take in what I'm saying then they'd realized I'm trying to offer a perspective based on the numbers and the facts. If I'm constantly contested on this matter I become more inspired to dig deeper which further irates decent people like you.
I am now inspired to show the South African gold and silver stocks traded on the London Stock Exchange prior to 1800 to further demonstrate the issue that needs to be voiced. I want gold and silver to go up. But what is the point of going blindly into the sector without clarity. I don't mind if gold bugs don't care about the facts, but I'd rather offer information that is useful when considering how much money to invest in gold and silver rather than stuck with a bill of goods (though it is clear there is much debate, or none, about the usefulness of what I have presented.)
Now let's look at your point about me not being an expert. True, I'm no expert but the data is solid. Yet, no one was satisfied with my claims and demanded that I come clean on my lack of knowledge of people like James Dines, Richard Russell and the Aden sisters. This is despite the fact that I have subscribed to Russell and Dines since 1995. Now, the true gold bug would say,"obviously, I haven't learned anything from those experts therefore my subscriptions must have been a waste of money." However, look at the performance of a person like Dines who is clearly an expert in gold. Dines has been wrong by a country mile. Look at the quotes that I have pulled from Dines during prior bear markets in gold. Is it not surprising as to the reasons why he would question himself? Doesn't it make you wonder what the reasons are that someone, who is an expert in the area of gold and silver, would openly wonder how they could have gotten it so wrong? Well, I wondered and did a little digging. That digging lead to the "research" that I attempted to present on my blog.
Thanks for taking the time to read my post GMiki.
regards,
Touc
This is what I'm seeing happen today, when I examine the financials of many of the junior gold producers. Their energy costs (a major expense for mines) are suddenly plunging, they can recruit labor and buy equipment at discounts from base metal operations that have suspended operations, and unlike companies like GM, their product (gold) isn't sitting on a lot, hoping and praying for a buyer to show up. In a nutshell, their profit margins are increasing rapidly - and gold doesn't need to go up in price for them to increase profitability.
I own junior gold producers with no debt, a pile of cash in the bank, millions of ounces of gold in the ground, huge operating margins at today's gold prices, and a market cap that is so low you have to shake your head in disbelief.
Please reference my November 17 article regarding gold during the gold bull market of the 1970's at dividendinc.blogspot.c.... That article applies to all three categories: Majors, Juniors, and exploration.
Hello Henal,
I agree with you that perception is reality however in the case of gold in the last year perception hasn't provided enough fuel to help gold and gold stocks go above the old highs. This is the reason that I've introduce the history component to see if there were some answers there.
Greetings Paultaut,
I think there is a grammatical error on my part regarding the XAU. What was meant to be said was, "...the long term trend higher that started in the 2000 as reflected in the XAU..." I can see where I wasn't clear. Thanks for heads up.
-Touc
In short, your most fundamental historical facts are incorrect. The U.S. government was absolutely NOT propping up gold during the panics of 1807, 1819, 1826, 1837, 1842, 1861, 1865. Gold was an entirely free agent that occasionally filled a commemorative coin, but that was about it. The United States of America was, at the time, a relatively minor economic force in the world, dwarfed by the power of England, France, Germany etc. It still followed the silver standard, NOT the gold standard.
In the 18th century, China, like today, was draining the world of its money, which, at that time, was mainly backed by silver. China, like other nations, was on the silver standard. The U.K. was also on the silver standard. A currency that was literally named for what it was the "pound sterling" (one imperial pound of sterling silver) reigned supreme in the world of currencies. But, silver from Europe and America was being fast drained away by the voracious appetite of the Chinese for the white metal.
In 1818, the silver standard was abandoned by Holland and replaced with the gold standard. This was followed, shortly thereafter by most continental European nations. In 1844, the silver standard was finally abandoned by its creator, Great Britain, in favor of gold. In 1873, the United States of America abandoned silver and adopted the gold standard.
In short, you are wrong. Gold did not perform well, historically, simply because the U.S. government was "propping" it up. Gold and the human psych has such a long and intimate association with one another, that it is unlikely that any action by the government against the price will suffice for long in suppressing it.
If you look further back in history, gold served as a safe haven during the time of Abraham when grain sought in Egypt, in the midst of a widespread crop failure in the Middle East was paid for with gold, during the buildup of the Athenian Empire after the Persian Invasion, during the later Peloponnese wars between Athens and Sparta, during the course of the Roman Republic, and, especially, at the fall of the Roman Empire, particularly in Palestine during the times of the Hebrew revolts against Rome, and at all times in history before and after all of these events.
The fact that people turned to gold during the fall of the Roman Empire is still evident in Britain, when people sometimes dig in their backyards and find a pot of Roman gold buried, long ago, by frightened Romans, and, later, forgotten about.
looking fwd to the homestake mining follow up article(s)
thanks!
I've been taken recently by this article on SA:
seekingalpha.com/artic...
It would be the best argument I've seen so far that counters your reasoning.
I must say, as interesting as your premise is, governments around the world still hold large stakes in this commodity for no other reason than to guard it. Could this be implicit proof that governments consider gold to be the currency of last resort, and not just the commodity it seems to be? What is your opinion on this point?
Since I haven't said so yet, thanks for a good read.
Every paper currency ever created has reverted to its intrinsic value given enough time.
Gold has had value in every society ever discovered, from tribes in the Amazon, the Egytians, the Macedonians, Greeks, Romans, and Byzantines. Gold has 10,000 years of history as a store of value.
To say golds value is purely irrational and psychological begs the question: compared to what?
While you make good points about other countries throughout history I will at least provide you with at least one source that I'm working from specifically from American history. While I don't know history very well, I do know there are many quality sources and yours may differ from mine.
If you get the chance please view the following chart:
3.bp.blogspot.com/_pRR...
note: you may need to cut and past the link. Enjoy.
Touc
dividendinc.blogspot.c...
-Touc
dividendinc.blogspot.c...
-Touc
Gimme a O!
Gimme a L!
Gimme a D!
What's that spell?
A millenia long consensus on a mutually agreeable store of value around the world. In a word ...
MONEY. The most desireable commodity.
It may not be perfect, but it's the closest thing humans have found for use as an honest medium of exchange (or store of value) throughout their entire history.
While you are free to ignore that history and its implications, you do so at your own risk.
Yes, that is absolutely correct. Everyone accumulate it as fast as you can. Its stability will be needed to bring in its honest, appreciating child.
Next time you're at the grocery store, try paying in gold and see what happens.
And if you want true protection against massive inflation and/or currency devaluation, buy a house. I'm sure you wouldn't mind the value of your mortgage "reverting to its intrinsic value" over time.
On Dec 10 01:55 PM E.D. Hart wrote:
> The US dollars value is purely psychological, and only accepted as
> valuable because it is backstopped by the "full faith and credit
> of the US Government." In short, the ability of our government to
> tax and borrow.
>
> Every paper currency ever created has reverted to its intrinsic value
> given enough time.
>
>
> Gold has had value in every society ever discovered, from tribes
> in the Amazon, the Egytians, the Macedonians, Greeks, Romans, and
> Byzantines. Gold has 10,000 years of history as a store of value.
>
>
> To say golds value is purely irrational and psychological begs the
> question: compared to what?
I got a good laugh at your comment. Man, I have stories from all three that would have you laughing 'til you cried.
Thanks.
-Touc
jeffee
Hyper inflation coming soon
Fear of future US prospects?
Gold remains Gold. The Internal composition of All of the various stockmarket indexes have changed drastically over the past 28 years, with many stocks no longer in existence.
What has GM done for its investors over the past 60 years? What has Gold done?
IMHO
The difference between gold and other investments is that humans have been agreeing that gold is valuable for 6,000 years. Take your choice of what’s going to protect your wealth and hold value for you long-term, but a 6,000 year trend is hard to argue with and dangerous to bet against. I’ll continue to bet on gold.