Do You Believe In The 12 Rules Of Goldbuggery?

 |  Includes: GLD, IAU, SIVR, SLV
by: The Financial Lexicon

An investing mantra many equity investors live by is to "buy on the dip." It appears the same is true in the world of physical gold. As investors in gold futures and ETFs such as GLD and IAU seem to be tripping over themselves to get out of gold, demand for tangible gold is skyrocketing. A Reuters article from Friday morning highlights the rush across Asia to buy physical gold. In the United States, the Mint has already sold 153,000 ounces of gold coins in April, more than the combined totals from February and March. In fact, in the midst of the gold price collapse, on April 17, the United States Mint sold 63,000 ounces of gold. That one day total, by itself, eclipsed the 62,000 ounces of gold sold by the Mint in March.

In terms of silver, retail demand has also been quite remarkable, despite the breathtaking drop in price. If you want to purchase 1 ounce Silver American Eagles from APMEX (American Precious Metals Exchange), you'll have to wait a while or pay a hefty premium. Most of the years for which the 1 ounce Silver American Eagle exists are sold out. And for those years that are not sold out, you will pay premiums in excess of 25%. A 2007 Silver American Eagle, for example, has premiums as high as $8.49 over spot. That is a 36.55% markup based on the current silver price of $23.23. While there are other dealers offering prices a bit lower (the $28 per ounce region), the markups, on a percentage basis, are still quite steep.

I know there are those who get their physical gold exposure through GLD, IAU, or other exchange-traded products. In the world of silver, I know some investors buy SLV or SIVR for physical silver exposure. What the current spike in demand in the face of falling prices tells me is that the group of investors who believe you don't own physical gold and silver until you can hold it in your hand is alive and well. Instead of breaking the spirit of precious metals enthusiasts, the recent price drop seems to be viewed as a buying opportunity. I guess someone forgot to send these people a copy of Barry Ritholtz's "The Rules of Goldbuggery."

You may recognize Ritholtz's name from his appearances on CNBC and Bloomberg. If you would like to read a copy of his lengthy curriculum vitae, you can do so here. While I don't consider myself a gold bug, gold is one holding in my diversified portfolio. As a gold owner, I would like to take this opportunity to address Ritholtz's 12 rules of "Goldbuggery" from the perspective of one investor (myself) who is neither obsessed with gold nor full of the hatred toward gold that some seem to possess.

Ritholtz's twelve rules are in italics, followed by my comments:

1. Gold is a currency - In his comments supporting rule number one, Ritholtz says, "[Gold] is a permanent store of value." It appears to me that Ritholtz believes people who own gold view it both as a currency and as a store of value. That is not necessarily true. I, for example, do not own gold because I view it as an easy to use medium of exchange or because I want it to become the world's future medium of exchange. Instead, I view it solely as a store of value.

2. The price of gold cannot fall, it can only be manipulated lower - I recognize that the price of gold can both fall and be manipulated lower. Whether one or the other is happening at any given time is irrelevant to me. The price is what the price is. As I explained in "Gold's Epic Plunge Should Cause Reflection On Why You Own It," I find it important to have an appropriate balance of how much in precious metals I own relative to my entire portfolio. If you truly own gold as a store of value and you manage your liquidity in a way that does not require you to sell it, then the recent plunge in price should have no negative consequences for you. In fact, in the aforementioned article, I noted one positive that results from the recent declines: "My cash flow will improve as my storage costs, which represent a percentage of the total value of my precious metals holdings, will now decline."

3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise - See my comments in number two.

4. The world MUST return to the Gold Standard one day - I own both gold and silver, and I would much rather see a fiat currency system that was managed in a way in which I would feel as if I could own the fiat currency as a store of value rather than owning precious metals as stores of value. Unfortunately, such a system does not yet exist.

5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher - I disagree. If the massive amount of money being printed was actually getting into the hands of the majority of the world's citizens, rather than just into the hands of the financial sector and investors, I would venture to guess that gold's price would be heading much higher from here. Until everyday people start to get their hands on the trillions in fiat currency being electronically printed, then gold will likely fall in and out of favor with institutional investors (who have more influence on the price than do retail investors), as those institutional investors continually change their minds about whether high inflation is a near-term risk.

6. Gold works whether the economy is good or bad - In his comments supporting this rule, Ritholtz had this to say: "When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!" If you come across gold investors who think in that way, they have likely learned the tricks of the trade from equity investors. The die-hard, buy-and-hold-stocks-forever investors, more than any type of investor I have ever come across, are fabulous at playing the "good news is good news" and "bad news is good news" game. When I read Ritholtz's comments for rule number six, it immediately reminded me of the comments we often hear from equity bulls regarding oil prices: If oil prices are declining, it is a tailwind for the consumer and good for stocks. If oil prices are rising, it is indicative of a strong economy and good for stocks. From my point of view, gold is a store of value. Whether the economy is good or bad, I don't care how gold's fiat currency price performs.

7. Gold will survive after the world economy crumbles - In the comments that followed this rule, Ritholtz again poked fun at gold investors. I remain open to the possibility that should the current monetary system collapse, gold will, for some reason, not be convertible into whatever new fiat currency system comes into existence. There are risks to every investment one makes. Regarding that risk to gold, I have carefully considered it and decided the likelihood of that occurring is not enough to cause me to sell my gold.

8. Never admit that Gold is essentially a sucker's bet - To support rule number eight, Ritholtz said, "Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008." His focus on gold's price performance over the decades tells me he does not view gold as a store of value, but rather as a financial asset that must generate a sufficient return in fiat currency terms. Owning something as a store of value has nothing to do with betting.

9. Gold is a rejection of government, and [its] control of fiat money and finance - In my opinion, gold is not a rejection of government and its control of fiat money. Instead, gold is a form of protection against the possibility that those who control the money supply mismanage their important responsibility.

10. All Gold discussions must contain ominous macro forecasts - Ritholtz supports this rule with the following comment: "Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future." In a way, with just a few modifications, his comment reminds me of what some would claim equity analysts do (questionable correlations, unprovable predictions, and an eternally optimistic view of the future). I am a gold owner who prefers to remain neither hopelessly optimistic nor consistently pessimistic. Instead, I strive to be realistic.

11. Gold is always rallying in one currency or another - Who actually believes this?

12. China & India know the value of Gold; the Western world does not - Perhaps that is largely true. Although judging by the recent demand at the U.S. Mint and APMEX, it appears that some people in the West share China's and India's views on gold.

As a result of the recent price declines in gold and silver, they have become a very hot topic in the financial media. If you are someone considering a purchase of precious metals, be careful of the big premiums in silver. Additionally, remain aware that some commentaries (such as Ritholtz's) are seemingly more intent on capturing attention and arousing emotions than on helping you become a better investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long gold and silver