The Case Against Gold

If you lucky enough to have a few bucks left in your pocket to invest these days, you are faced with the dilemma of what to do with them.

No question but that stocks are cheap. But the chances are you already own stocks and you have lost 50% in the past year, so why would you want to add to that category? For those out there that are waiting for that Vee shaped stock market recovery, forget it. That is the least likely scenario out there. We are not getting out of this mess anytime soon. Pick any stock that you like. Regardless of how cheap it is today you can still lose half of your money in a fortnight.

Bonds are the other traditional alternative. They are problematic too. Either you get a high-grade bond like Treasuries that pay you nothing or you can invest in any of the busted corporate bonds that are already trading at big discounts. It is not hard to find decent corporate bonds around these days that pay you a yield north of 6%. So what? Most corporate bonds are going to be downgraded in the coming years. Do you really believe that GE can keep that AAA? Not a chance. Keep in mind that the vast majority of corporate bonds are never paid off. They are just re-financed. In today’s market even the likes of GE can’t go to the capital markets without the benefit of an FDIC guarantee to get the bonds out the door. As it looks now, a lot of those corporate bonds that look so nice today are going to pay you off with more paper, not cash. The “best case” is for a recovery in the global economy. While that does not look likely, if it should happen it would result in a rapid increase in interest rates and there goes your bond portfolio.

Real Estate is another big investment category that looks like an area to avoid. I think that REITs in general are just a huge black hole waiting to suck you up. Walk around the main streets and malls of your area. The stores are closing folks. In a year we will have lost an incredible amount of commercial real estate tenants. If you think there is safety in commercial REITs you are just going to be disappointed.

What is “safe” has a negative carry to inflation so you lose. What is worth looking at is fraught with risk. If anything that is backed by “paper” is suspect, then surely Gold has to look good.

The market seems to believe this. We briefly broke through $1,000 last week. The TV talking heads that are not allowed to speak on camera without a “BUY” recommendation on something have been touting the yellow metal non-stop.

I do not make market calls. There are too many surprises out there on a daily basis to stick one’s neck out. If gold were to be either $700 or $1,200 in two months I would not be surprised. The only market bet that I am prepared to make is that substantial volatility in all asset classes will be the norm in coming months. Clearly an opportunity to make money. Just as clearly an opportunity to lose some more.

With all of this chaos, it is not surprising that Gold catches a bid. It has always been a go to asset class in times of trouble and we have some trouble.

One of the big arguments for gold is that all of the money that all of the Central Banks are printing these days will come back to haunt us at some time in the future and inflation is going to come roaring back on a global basis and gold is going to soar when that happens.

That will almost certainly happen. I wish today that the near term forecast had a risk of inflation attached to it. Bunk. Take a look at all of the other asset classes that are a store of wealth. They are tanking. On that basis, gold may retain its value better than stocks, bonds and real estate, but that just means you will lose less. All investments are “Timing Trades”. In 2009 timing is everything. We are facing massive deflation today. On a global basis the Private Sector has reduced consumption by an astronomical 10% on an annual basis in just the past few months. Inflation will be the end result of the problems of today. But first we must ride ourselves through several more years of deflation before inflation becomes the “big risk”.

Historically gold has been a place to hide when the dollar is weak. If the dollar falls by 10% against the Euro, gold has to move up vs. the dollar . That is just the way that the capital markets have moved. That is not the case in 2009. The Euro/$ is reflecting the problems in Europe and all those troubled countries east of Germany. For the foreseeable future these fundamentals will not go away. Therefore gold is currently running against its historical trend. Always a red flag.

A long time ago, I was a young buck trading commodities. It was a time like last spring when commodities were hot and money was flowing to them. Copper was my commodity then. The price was pushing $3 per pound and I was super bullish. A guy who had been watching the tapes for a long time stopped by my desk and dropped off a roll of pennies. He said, “It can’t go higher. They will just melt the pennies”. Way back then pennies were made out of copper versus the zinc of today.

Of course he was right. In the months and years that followed copper slipped back to that comfortable $1-2 range that it is stuck in today.

There is a well-quoted fact. 98% of all the gold ever mined is still out there. In the next few years, things are gong to get very tough for all manner of consumers. When there is no food in the cupboard, when there is no money to pay for health insurance or doctor bills, gold will be liquidated. When we have sucked through our cash savings, we are going to liquidate what is left to keep things going. That means that people will sell their gold. When you can sell that old wedding ring for $400 and you are hungry, it is not much of a choice.

Watch the business channels in the US. There are non-stop commercials, “Sell Your Gold Now”. An industry has emerged where small gold holders can mail in their jewelry, have it melted and get a check in the post. This trend has not had a meaningful impact on global supply/demand conditions yet. But, as the economies around the globe slow further, as consumers and governments run though their liquid reserves, they will sell what is still liquid and has some value.

Gold is off nearly 10% since that $1,000 print. It was fear and front running that got it to that price. There was no real demand. If you feel today that you are long and wrong, take heart. The ‘fear’ thing is not going away any time soon.

To be a bull in anything today, you have to be able to make a case for a ‘double’ in the next twelve months. This means gold at $2,000. Gold bugs, there are an awful lot of things that are more likely to double from today’s levels in the next year than gold. Let’s face it. If the S&P is at 500 in a year, gold is a short too.

There is no “safe” place to hide.

Comments

[CTMike:]

Kelm,

I agree with you. I've been a gold holder/investor since 1980. More than ever, this market is unpredictable. All the facts point to gold going up (a lot) but since when do facts equate to reality?
I'm at a total loss as to what to do with my investments/life's savings.

Investing in anything today is not much different than a visit to the local casino. Unfortunately, I honestly believe you have better odds at the casino - at least you know exactly, to the decimal point, what your odds are at the casino and in the market you are at the mercy of some of the best minds in the world trying to pick your pockets with no rules.. Right now, under the pillow seems to be my safest option.

Gold should be going up and isn't. Why? Some force we don't understand is preventing it from going up and if we don't understand it, how can we possibly put a risk on it - - no thanks! Like this article suggests, noting is going up for now. So why put $$ in gold, or anything, if you don't have a clue if it Will go up or down 50%? "If" you trust your cash fund , that may be the place to be. And since recent experience suggests no place is really safe, maybe your pillow along with a 45 handgun is the place to be until things settle down.

The hardest thing for me remember is that you don't have to make a big return "today" - - be patient and wait until the waters are safe again. Tomorrow always comes and eventually tomorrow will be safer - OR, there is a clear direction to go. I'm still long GLD plus several gold securities but ready to pull the trigger for safer waters (pillow).

For you folks that think I have no guts/brains, you haven't been around long enough. I can remember the days when the best minds became doctors, lowers, etc. Look at Harvard, Princeton, Yale, etc. They are not focused on humanity anymore. They were forced to get with the times and have changed their focus to market manipulation (my words) to enrich yourself. I can't compete with these guys and you are a fool if you think you can.

I'm an engineer by training with specialty in failure analysis. Right now all the data suggests a force we don't understand/recognize is in control. Unless you understand what is in control, you have extremely little chance (random) of being successful. If you recognize the force, at least you have a change of predicting the near term direction.

Everything is subject to the a natural law of distribution. When this all settles, there will be a few folks that "guessed" right and made a fortune. 99.99% of everybody else guessed wrong and lost a little to a lot. Then there are the folks that really know what is going on - you will know them in 10 or 20 years.

Finally, if anybody can explain the movement in gold, please self nominate yourself for the Nobel prize in economics. Let's see data; not probably, maybe, etc. Facts prove theories. Proven theories can make you successful; anything else is a gamble!




On Mar 04 08:47 AM kelm wrote:

> As my readers know I have been long gold until this week when I went
> neutral and then short. I continue to believe that before this crisis
> has worked itself out we will see a period where there is a mass
> flight to gold sending it dramatically higher, though that period
> may be brief with a rapid fall back. However, the action late last
> week and early this week indicates that gold is fast losing strength
> in the near term and is likely headed for a substantial fall. As
> long as gold ETFs are driving the buying of the metal while people
> globally are turning in massive amounts of scrap to convert into
> local currencies the conditions to move higher appear absent. This
> was not my view even a week ago but the facts have changed.
>
> What the author points out is that we are in a very volatile period.
> Many long term predictions based on fundamentals will prove correct
> but if the timing is off and you don't change course you will be
> dead right rather than profitably right.

Mar 04 05:52 PM

[CTMike:]

John,
You don't live in Zimbabwe (I hope).

If you investment horizon is 20 or 100 years, you may be safe. But do you really care what your portfolio will be in 100 years if you need it to fund your life style in a few years or even 10 years. The problem with historical data is that it can't predict accurately near term.

Yep, gold has been good to us for several years but pleas to explain why it has not been good for the last year. The world is coming unglued and gold has not responded. If you can't explain this with facts then you don't know. If you don't know, you are not any smarter than everybody else that is guessing.


On Mar 04 09:49 AM John Polomny wrote:

> Yawn another fool who has learned nothing and forgotten nothing.
> Gold is the best performing asset for the last eight years. Every
> year we are told that gold has topped, it produces no income, it
> is a commodity, etc... ad infinitum. The fact is for over 5000 years
> gold has been a store of value. Look at the the Dow to gold ratio,
> it has went from around 40:1 to a recent 8:1 and will eventually
> get to 1:1. That will be the top for gold. I agree it will be volatile
> but I have been holding gold since 1998 and so far so good. I recently
> caught a video on the internet that showed people in Zimbabwe panning
> for a few grams of gold to buy bread for the day. The food sellers
> were not accepting dollars, euros or rand they were accepting gold.

Mar 04 06:15 PM

[mrbill:]

The problem with holding gold is that it will likely be outlawed if things get really ugly. Oh, but that could never happen in America right? One way or another, you're getting screwed. Right now investors are being herded like cattle into one asset class after another, losing money at each turn. If you go into equities, they fall just when everyone says they can't go lower. If you've missed the boat on treasuries and know they're a safe mid-term bet due to deflation, as soon you're you're in in, they fall. Go into oil because higher future contracts and other "fundamentals" make it a no brainer, then suddenly, it goes lower. Strange isn't it? Seems like you need to be doing the opposite of what makes sense. And even if you can keep your head above water, as a last resort, your taxes are going up. Despite everything, all that is occurring today has happened many times before and people still don't get it: "governments" are robbing their citizens of their wealth. If you haven't figured it out, especially with all the too-big-to-fail/too-sm... bailouts, you're either blind, stupid, or both.

Mar 04 06:21 PM

[CTMike:]

Hope and praying is not an investment strategI'll pray for you - you need it.


On Mar 04 11:07 AM Kraut wrote:

> Usually we don't regret the choices we made, but mostly those we
> didn't made.
>
> I haven't been invested in stocks but in container ships - and because
> of falling imports/exports the outlook is grim, making me anticipate
> no returns for this year and I'm not too optimistic about next year.
>
>
> The whole issue of gold at the moment is something I consider essential
> risk diversification.
>
> If the economy makes a turnaround, my returns will come back. A little
> idle gold (physical, stocks) is a cost I'm more than willing to take!
>
>
> However, in the worse case scenario (let us all start to pray), gold
> will turn out to be a "life insurance". To miss this is something
> I could ill afford.

Mar 04 06:21 PM

[mrbill:]

Oh, one last thing. That comment about all the gold at fortknox. That was funny, I admit.

Mar 04 06:25 PM

[TERN:]

New Zealand.


On Mar 04 12:27 PM plumstupid wrote:

> Brazil? Huh. More likely that Brazil will be too unsafe for Americans.
> As will all of the Americas. Might think about someplace where there
> will be allot less animosity about collapsing the world economy.
> Someplace with less cultural propensity toward violence.

Mar 04 06:45 PM

[CTMike:]

Unfortunately, Louise, no matter how smat he has been in the past, has never run into this situation in the past. Tell me please, when was the last time we had a deficite of 2+ Trillion dollars and climbing. If the market is so smart and projects into the future, then why isn't gold already at $3500? Something is going on that Louise doesn't understand unless he forsees the DOW at 2000 in the near term - or maybe the DOW at 1000 and gold at $500?


On Mar 04 12:15 PM freddyv wrote:

> "Historically gold has been a place to hide when the dollar is weak."
>
>
> You miss the point: ALL currencies are weak and so gold will be the
> true, "currency of last resort."
>
> Louise Yamada pointed out that gold is likely to come into a 1:1
> to 1:2 ratio of the Dow within the next few years and that makes
> a lot of sense.
>
> If you don't know who Louise Yamada is I suggest you Google her because
> she is probably the single best analyst on Wall Street today. She
> is no spring chicken and understands how to use technical analysis
> in combination with all sorts of other data.

Mar 04 06:53 PM

[svosavvy:]

How about costa rica, it's nice and it's a blue zone. People live unnaturally long there, however, it's probably because they don't worry about money. If you believe Karl Popper or George Soros then you will think for yourself and not be a victim of someone else's manipulative function. Be careful of the herd mentality, gold owners are no longer contrarian they are mainstream. You are among the likes of susie orman and the boo yaa cramer man.

Mar 04 09:50 PM

[Average Fool:]

The sellers are already out there. Each week, as I visit my coin shop, I consistently see sellers out numbering buyers by 2 or 3 to 1. My coin shop always has American Eagles for sale so the imbalance I see is not due to a shortage of bullion coins.

With the financial meltdown I began buying gold as insurance (survivorship). As I learned of Milton Friedman's "inflation is always and everywhere a monetary phenomenon" I accumulated more to protect against the dollar printing presses. Finally, I have reached the conclusion that gold and silver are a legitimate asset class that has yet to be recognized as a prudent way to reduce fluctuation and increase return. And just wait until the Chinese weigh in in a serious manner.

In any event, I am not concerned about the recent decline as it allows me to accumulate more coins and average down. I will be a buyer at 880 and if it comes to that at 680 as well. My grandchildren will thank me.

Mar 04 10:06 PM

[wdhalgren:]

If the stock market drops another 40% deflation sets in, we are headed for defaults on a global scale that will make the great depression seem tame.

US government -- declining revenues, increasing debt. US states -- more of the same and worse. Every pension plan and insurance company in the country will implode.

Europe-- same as above, plus incredibly overleveraged banking system and eastern Europe meltdown, with contingent liabilities for the Western European banks.

Britain -- financial based economy destroyed, high govt dept, banks worse than the US.

Asia -- collapse of export economies.

Middle East -- collapse in oil demand.

Russia -- massive collapse due to oil demand.

Etc., etc., etc. Debt service quickly becomes unbearable in a deflationary environment as government revenues tumble, while interest rates begin to rise as debt investors run for the hills. Who has the funds to buy massive goobal government bond offerings in a deflationary environment? China? No way. So what happens? Central bankers pick up the slack. Global debt monetization.

Anything is possible, but under the scenario you described above, and the resulting defaults and/or monetization, which would you rather hold? Dollars or gold? Euros or gold? Yen or gold. Pesos? Rubles? Francs? Personally, when it comes to burgeoning supply, I'm a lot less worried about the housewife's wedding ring than I am about Bernanke's printing press. But that's just me.

Mar 04 10:45 PM

[plumstupid:]

The Banksters are playing the sheeple big time. You describe what they are doing perfectly! Everything is not enough for the Banksters. The Banksters have given their bought and paid for congresscritters and president their marching orders. The last act of a failing regime is to loot the treasury. Make no mistake, what is happening in the markets is planned. They are going to take everything you let them. Then they will take more.


On Mar 04 06:21 PM mrbill wrote:

> The problem with holding gold is that it will likely be outlawed
> if things get really ugly. Oh, but that could never happen in America
> right? One way or another, you're getting screwed. Right now investors
> are being herded like cattle into one asset class after another,
> losing money at each turn. If you go into equities, they fall just
> when everyone says they can't go lower. If you've missed the boat
> on treasuries and know they're a safe mid-term bet due to deflation,
> as soon you're you're in in, they fall. Go into oil because higher
> future contracts and other "fundamentals" make it a no brainer, then
> suddenly, it goes lower. Strange isn't it? Seems like you need to
> be doing the opposite of what makes sense. And even if you can keep
> your head above water, as a last resort, your taxes are going up.
> Despite everything, all that is occurring today has happened many
> times before and people still don't get it: "governments" are robbing
> their citizens of their wealth. If you haven't figured it out, especially
> with all the too-big-to-fail/too-sm... bailouts, you're either blind,
> stupid, or both.

Mar 05 12:47 AM

[Fighting Yoda:]

No trade is one way – gold also is not. It has done well last some years, doing much better than everything else recently. But again it is not a one way bet. Just see what happened to rest of the commodities – oil, copper and the rest.

Gold & Inflation – Gold has never tracked inflation at all – else it would be $2,500 starting from 1980.

Inflation or Deflation – We are going to have deflation now – should be clearly evident to all. Lot of arguments are made about money printing and deficits etc. Remember Japan ran much much bigger deficits (and stimuluses) – but could not prevent deflation and recession in the 90s.

Gold demand – 60% gold demand is jewelry – this demand is going down – buyers do not have money, $30 Trillion wealth destruction. Some of the demand is being offset by investment demand – not all.

Have gold as part of your portfolio – do not bet on it too much – fell now from 1000 to 910 in a couple of weeks, earlier recently from $1022 to $680. I has some GLD, sold it recently.

Mar 05 01:20 AM

[buddhabill:]

Let's assume that the global monetary system doesn't completely collapse, which commodity will be king: Gold, Oil, or Food?

I'm thinking oil, since it is a major input for food production and distribution.

How to play oil? XOM and some Canadian Energy Trusts? 2011 leaps?

Mar 05 02:16 AM

[plumstupid:]

Further to my above comment about brutal suppression of of any revolt.

Most recent show of abject gov't brutality was at the convention in Minneapolis. Worryingly, it was only a hint of how brutal they will be.

New Orleans - Katrina. Blackwater mercenaries confiscating weapons in wealthier parts of the city. Police killing citizens trying to cross a bridge to find food in an area less affected by the storm.

WTO protest in Seattle. The ground work for all gov't response to protest since. The gov't reaction served to illuminate how terrified the powers that be are of another popular uprising like that of the 60's - 70's.

Remember too, if they could kill four in Ohio in 1970 they'll have little compunction in these days of SWAT and young robocops.


On Mar 04 11:18 AM plumstupid wrote:

> Are you familiar with NORTHCOM? When the revolt comes they won't
> need food stamps or checks. They will put it down in the most brutal
> fashion. Count on it.

Mar 05 05:26 AM

[QuasiYoda:]

Not much of a case

Gold is an insurance policy. Now is a time when holding it is very wise.

Could it pull back near term? Sure. Could the need for it suddenly arise with great intensity? Yes again. Gold has been in a bull market for 7 years Thus far odd numbered years have tended toward flat pricing while the spring of even numbered years has given us parabolic moves . . . So now is the time to be scaling into a position for a big move late this year and into next spring 2010.

Mar 05 05:51 AM

[norom:]

I enjoy articles and conversations where gold is discussed as an investment. I get irritated when the gold bugs plough through spouting off this "gold is currency" nonsense. The people trying to sell gold as currency are trying to sell gold for money. I wish more educated minds would step out and shout down the gold-bugs.

Mar 05 08:30 AM

[Bones:]

I agree with most of your points. In foreign currencies gold was hitting new highs well before it neared the $1000 mark in US$. Strength in the dollar is undeniable, just look around you and there are hundreds of examples of how your dollar is buying more than it has in years, from gas to clothes to food to real estate. I see two drivers for gold, fear and inflation. Fear is the most fleeting and we've seen this move already. The inflation move is the real driver and we have the exact opposite occurring although we will eventually see it. There is truly nowhere to hide (at the moment) but stocks are NOT cheap. The S&P is trading 14-16x depending on who you believe and this bakes in a 2nd half recovery that will not come. The market could still be cut in half in a worst case scenario.

Mar 05 10:11 AM

[Menard:]

Gold is money. It has always been considered money. Nobody who buys gold expects to use it to "buy a loaf of bread in the future". It can be converted into any currency when the time comes to spend it.

Mar 05 07:41 PM

[Hari Seldon:]

"No question but that stocks are cheap."
You lost credibility right there.

The case for gold is this:

I can take it to any place in the world and the people there, no matter what language they speak, understand the language of gold.

Governments can print money to their hearts content, but my gold cannot be duplicated.

When you make a claim that "their is no safe place to hide". This is pure sophistry designed to keep people in their paper holdings which will be worth nothing when there is no one to redeem or purchase it.

"Paper! Paper!
There is no gold in Aqaba.
No gold! No great box!"

Mar 07 01:19 PM

[Kaleb22:]

Wake up Bruce, you are using history to explain a future crisis. Look what is right in front of your eyes instead of looking at the past. We currently have a rogue government that is bought and paid for, there is ZERO transparency in the supposed stimulus bills, our president punishes the workers/savers and gives handouts to his banker buddies and socialist zombies, not to mention that we are now running up massive debts to fight deflation that we have no intention of paying for. I for one have had enough of all this nonsense, including your gold bashing.

You are the typical economist who thinks he can corner the market because he studies old models and graphs, all this knowledge will be useless in this crisis becuase it will shatter your mental paradigm. This is my one and only warning, if you don't put all your money in gold and silver related assets you will lose everything you have. EVERYTHING.

Mar 07 10:15 PM