The best investment advice is probably that one should never assume that the media will always provide unbiased, well-researched opinions on just about anything. The latest story being trumpeted by the herd is about the dramatic drop in gold prices. It would appear that the price of gold has fallen enough to qualify as a "bear market," and the press seems to be all over the story. They largely missed the 10-year rise from $255 in 2001 to $1922 in 2011, but after gold fell to the $1300s last week, we're hearing about what a terrible investment gold is now… and throughout recorded history.
Let me begin with a piece by the influential New York Times economic columnist, Paul Krugman, who wrote a column on April 11 called Lust for Gold. He crowds a lot of misinformation into one brief column, encapsulating at least five of the most commonly-spread myths about gold as an investment.
Myth #1: "Gold is Not a Safe Investment." In his April 11 column, Mr. Krugman said, "historically, gold has been anything but a safe investment." To prove that point, he focused on the 20 years (1980-2000) when gold's price fell. Of course, you can assert the same thing about stocks by looking at 1929-1949 or the more recent 1999 to 2009 "lost decade" in stocks. When it comes to performance, you can prove any point you want by choosing the most favorable starting and ending dates.
So, let me choose the dates. Since America was founded in 1776, gold held its value when all of our early paper currencies - like the Continental or Lincoln's Greenbacks - failed. In the 100 years since the Federal Reserve was born, gold has risen from $20 to over $1400, up 70-fold. Since the dollar was untethered from gold in 1971, gold has grown 40-fold, from $35 to $1400. In the last 12 years, gold has risen every year. For the first 12 years of the 21st century, gold rose 510% vs. 8% for the S&P 500.
Of course, both stocks and gold can be great long-term, but don't say that gold has been "anything but safe."
Myth #2: U.S. Gold Investors are "Bugs" (to be squashed?). Throughout his April 11 column, Krugman refers to gold investors as "bugs." Krugman regrets the "recent rise in goldbuggism," implying investing in gold means that you belong to a rather oddball cult. But most gold investors are just typical investors that believe in moderation, a balanced portfolio, with the largest portion in stocks but a small (5% to 10%) position in precious metals and related investments. Most Americans own no gold, so don't worry, the gold "bug" is not that contagious.
Myth #3: Gold has No Intrinsic Value. Krugman maligns gold as just "a decorative metal" with little practical value - but isn't that even more true about paper? Krugman ignores the vital role gold has served throughout recorded history. Aristotle favored gold as money since it is durable (it will not corrode over time), portable (carrying large values in small weights), divisible (malleable), and it is intrinsically valuable (rare and desirable). This diagnosis has been proven throughout the life and death of nearly ever paper currency ever invented.
Myth #4: The Case for Gold Relies on Rising Inflation. In his April 11 article, Krugman wrote, "How can we rationalize the modern goldbug position? Basically, it depends on the claim that runaway inflation is just around the corner." That's not true. The case for gold depends on many other factors. Gold rose from $255 in 2001 to $1920 in 2011, despite a decade of hardly any significant inflation in Europe or the U.S. Gold has risen because of more demand from a variety of sources - more central bank buying, new gold exchange-traded funds (ETFs), and billions of people in China, India, and other emerging markets who are finally able to afford to buy more gold jewelry, coins, and bars for their savings and investments.
Myth #5: The Euro is the New Gold Standard. In his April 11 column, Krugman said, "the modern world's closest equivalent to the classical gold standard is the euro, which puts European countries back under more or less the same constraints they faced when gold ruled." This is Krugman's most bizarre statement. There is no gold backing to the euro, and several euro-zone nations have violated all of those "constraints" with impunity. Perhaps Krugman's statement reflects his faith in the central planning of the currency czars of Europe, but the euro-zone is hardly the paragon of fiscal austerity and virtue he claims it is. The euro was born on January 1, 1999 at an IPO price of $1.18. At the time, gold was $285 per ounce. Since then, the euro has risen by only 10%, to $1.30, but gold is up about five-fold (+400%), to $1425.
Bonus Myth: A $1 Trillion Platinum Coin Will Balance the Budget: I won't give this idea full "myth" status, since I can't imagine any sane person believing it. It started as a joke and almost ended as a real coin. During the big debt-ceiling debate of August 2011, some bloggers jokingly suggested that America "mint" a $1 trillion coin to magically raise the debt ceiling by adding $1 trillion to the Treasury's balance sheet. The idea was lost until talk of the "fiscal cliff" arose late last year. Then, on January 7, 2013, Krugman endorsed the idea, writing, "Should President Obama be willing to mint a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely…By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling - while doing no economic harm at all." This is a stretch for just about anyone with common sense.
Some "Yankee-Centric" Gold Myths
The U.S. press naturally quotes American sources more than foreign gold experts. As a result, much of their reporting gives undue weight to what various U.S. experts - many of whom don't understand gold - are saying.
Myth #6: Gold is Down 30% from its Peak. The dollar is up lately, in terms of many other currencies, in part because these other currencies are falling faster than the dollar. Most central banks are "easing" with a vengeance, so today's currency wars represent a "race to the bottom," to gain trade advantages.
In currency markets, as in physics, all things are relative. In particular, the Japanese government is now inflating the yen far faster than we are inflating the U.S. dollar, so gold has actually risen over the last year, in yen terms. In fact, gold set a new all-time high in terms of the Japanese yen earlier this year.
Gold has also risen in the last year in terms of South Africa's rand and Argentina's peso, while gold has fallen slower in terms of the Brazilian real, Swiss franc, and euro than it has in terms of the U.S. dollar.
Myth #7: Investors Have "Lost Faith" in Gold: In the April 5 edition of The Wall Street Journal, an article headlined Golden Moment Wanes for Investors quoted bears on Wall Street saying, "Thursday's fall was the latest evidence that investors have lost in faith in gold." The article discussed changes in ETF demand, while ignoring the soaring physical demand for gold. The U.S. Mint says that 292,500 ounces of American Gold Eagles were sold in the first quarter, up 39% from 2012's first quarter. Silver sales were up even faster, despite long delays in manufacturing and delivery of silver coins, due to rising demand.
Last week, on Tuesday, April 16 (the day gold reached its bottom price of $1321), sales of American Gold Eagle coins hit 33,000 ounces, plus 2,500 ounces of American Gold Buffalo coins, the highest one-day total of the year. This level of physical demand is even more pronounced overseas. While gold ETF buyers can be trend-followers, buyers of the physical metal are bargain-hunting buy-and-hold investors.
Myth #8: George Soros Matters. When gold fell in mid-February, most headlines blamed the fact that some big-name hedge fund managers sold their gold ETF shares in late 2012, according to filings with the SEC. In particular, the press cited Soros Fund Management cutting its holdings in the SPDR Gold Trust by 55% to 600,000 shares. Some other funds - like Moore Capital Management, Lone Pine Capital, and Scout Capital Management - said they sold all of their SPDR Gold Trust shares in late 2012.
It really doesn't matter how the notoriously fickle, trend-following New York hedge managers feel about gold this quarter vs. last. North America only accounts for about 7% of global gold demand. Within that small sliver, the New York hedge funds are a small bite of a small sliver. Last year, India bought 864.2 metric tons of gold and China added 776.1 metric tons, according to World Gold Council. These two nations account for over half of gold demand. Emerging markets account for 74% of demand. Europe adds another 15%. Global traders don't change their mind about gold as often as hedge fund managers do.
Some Common Complaints about Gold that Just Aren't True
Myth #9: Good Economic News Hurts Gold. Recent headlines in The Wall Street Journal make it clear that the press is transfixed with the idea that gold rises on bad economic news and falls on good news: Outbreak of Optimism Means a Fearful Time for Gold Bulls says one typical headline. Their reasoning is that the Fed might end quantitative easing (QE) if we return to good times. However, gold now rises on global prosperity, when more folks can afford the luxury of gold jewelry or a more diversified portfolio.
Back in 2001, when the current gold bull market began, the poor ("emerging") markets were responsible for only about 15% of global gold demand. By 2011, according to the World Gold Council (WGC), the emerging markets accounted for 74% of total gold demand. Much of gold's rise comes from more riches in formerly-poor lands. The correlation between liquidity and gold trumps any correlation with inflation:
- Global liquidity in the year 2000 was $2.5 trillion and gold was $275 per ounce.
- Global liquidity today is over $10 trillion and gold is over $1400 per ounce.
Myth #10: Gold is a "Bubble." If you search "Gold" and "Bubble," you get 124 million hits, more than three times as many as for Bond and Bubble. The "B" word was cast about casually in September 2011, when gold peaked above $1920 per ounce, and it was revived lately, during gold's sharpest fall.
Classic bubbles involve quick doublings and rapid 50% price declines, followed by many years, if not decades, of sideways motion. Think New York stocks in 1929, gold in 1979, Tokyo stocks in 1989, or NASDAQ in 1999. By contrast, gold didn't see a rapid doubling or quick retracement. Pundits compare the recent gold collapse to 1980, but there is no comparison. Back then, gold tripled in seven months and fell 45% in two months. Silver fell nearly 80% in two months. This time around, gold grew gradually. It is now in a bear market or a bull market correction, but it does not fit the classic investment bubble mold.
Myth #11: Demand is down (measured by what?): Last month, the Associated Press newswire reported a 4% decline in gold demand in 2012. The first sentence of their report explained the headline: "Global gold sales slipped in 2012 for the first time in three years as the biggest central bank purchases in half a century weren't able to offset a decline in demand from India….The World Gold Council said that 4,405.5 metric tons were sold in 2012, down 176.8 metric tons, or 4%, from 4,582.3 metric tons in 2011."
If readers continued to the very next sentence, they would learn that "the value of gold sold last year rose to an all-time high of $236.4 billion because of the rising price for the yellow metal, which rose 6% to an average of $1,669 per ounce." Nearly all businesses report their annual sales figures in terms of dollars, not by volume or weight of objects sold, so the headline was misleading. Gold sales rose 2% in 2012:
2011:4582.3 metric tons = 147.32 million ounces @ $1571 per ounce = $231.4 billion in sales
2012:4405.5 metric tons = 141.64 million ounces @ $1669 per ounce = $236.4 billion (+2.16%)
Myth #12: Gold Offers No Income… as opposed to 90-day Treasury bills, which yield 0.09%, or bank CDs yielding 0.15%. Gold competes with currencies, not stocks, so whenever interest rates are this low, gold is on an "even playing field" with paper money, giving gold the advantage, since it is so difficult, costly, and time-consuming to mine an ounce of gold, while another $1 trillion a year is easily created by the U.S. Treasury, in cooperation with the quantitative easing policies of bond-buying board at the Fed. The Fed is committed to its zero-interest-rate-policy until at least 2015, so gold is free to compete fairly.
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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. I have no business relationship with any company whose stock is mentioned in this article.