9 Cures for Gold Fever

The Only Valid Reasons to Buy Gold

If you feel that Financial Armageddon is coming or they just delivered crates of automatic weapons to your town, and none of the crates is addressed to you, then by all means, buy gold. If owning a significant amount of gold is the only way you can sleep at night, then buy gold. But don't expect gold to be a terrific long-term investment.

Fellow Seeking Alpha author Vitaliy Katsenelson recently wrote a hilarious article titled Five Reasons to Avoid the Gold Rush. There are many valid concerns about the future of the dollar, the economy and all global currencies. As I have written previously, I share many of those concerns. To give equal time to the gold bugs, the following is a list of commonly-used rationales for owning gold.

Common Rationales for Owning Gold

1. The Federal Reserve is printing money furiously this will cause inflation.
2. The government is has borrowed more than at any time in its history. The government will continue to borrow, devaluing the dollar.
3. While the dollar is devaluing, all other global currencies will devalue to stay competitive. No currency will be safe. (valid point made by Andy Xie)
4. Gold has tripled in price over the past decade.
5. Governments can't be trusted to keep the currency and other assets safe.
6. Gold is a good diversifier.
7. Worldwide (or country wide) collapse of governmental and/or financial institutions is coming.
8. Smart hedge fund managers are buying gold.
9. Pundits are saying there will be a rally in gold.

Except for reason #7, every one of the above arguments is either true or a valid concern.

As my readers well know, I am not a gold bug. I agree with most but not all of Vitaliy Katsenelson's points. To counter-act "gold fever" I have added a several well-known arguments as cures for the gold fever.

Nine Cures for Gold Fever

1. The price of gold is highly volatile. The numbers of dollars an ounce of gold buys each year varies wildly. This is an erratic way to store your wealth. Less volatile instruments are available.
2. Owning gold has little utilitarian value. It is not like owning an oil well which produces fuel or owning a factory which can produce widgets at a profit. I can do without gold, but I cannot do without my fuel or my widgets. Like a work of fine art, gold is only worth what others perceive it to be worth. Amazingly, gold has mysteriously kept its value through the millenia valued only in of itself.
3. As I have written previously, there are far better ways to protect against inflation such as inflation-indexed bonds. These instruments track inflation very closely, and make the borrower whole. (Assuming that the official CPI is calculated somewhat accurately)
4. Furthermore there are income-producing assets which are good inflation hedges, but don't necessarily track inflation from year to year such as commodities, equities, commercial real estate and residential real estate.
5. Unlike stocks or bonds, gold does not generate a cash flow. gold just sits there, it does not earn interest or pay dividends. While gold may produce speculative profits or speculative losses, it does not generate real wealth.
6. Some gold ETFs are shams in that they don't actually hold physical gold. Even the ETFs that are legitimate will have a hard time putting the physical gold in your hands once the Financial Armageddon arrives.
7. There is a risk of theft when holding gold in its physical form. During Financial Armageddon, insurance claims will not be honored.
8. Gold costs money to store and insure. It has a negative carrying cost.
9. When compared to stocks, commodities, bonds, commercial real estate and residential real estate, over the last 200 years, gold has been by-far the worst-performing asset class.

Gold Bug Rationales	Counter-Argument
Gold has tripled in price.	See cure #9 above. Over the long term other asset classes have far outperformed gold.
There will be a rally in gold.	This is merely speculation. No one knows the future price of gold. If they did, they wouldn't be telling the world. Avoid the hype.
All global currencies will devalue. No currency will be safe.	See cures #3 & #4 above. There are far better ways to protect against inflation
Governments can't be trusted to keep assets safe	But can your neighbors or local thugs be trusted? Can the ETF issuer be trusted? See cures #6 and #7. Furthermore when you can't trust one government or institution, then diversify your assets among several governments and institutions.
Gold is a good diversifier.	Gold is a good diversifier, but there are other assets that diversify even better, and pay interest or nifty dividends. See cures #5 and #9.
Smart people buying gold	Just as many other smart managers are saying "Don't Buy Gold"
Worldwide / local collapse of governmental and / or financial institutions	Financial Armageddon is not coming. In the U.S., the rule of law is mostly intact. (except for the GM incident)

Nine valid rationales used by the gold bugs have been counteracted using only six cures. The arguments for owning gold are outweighed by the arguments against it.

For the Investors

Since Financial Armageddon isn't coming, and the rule of law is still somewhat intact, put your money to work for you in other assets with a better rate of return, such as those mentioned below in my disclosure.

FULL DISCLOSURE: Long VNQ, U.S. Equities, Non-U.S. Equities, Emerging Markets Equities, US TIPS and WIP. No holdings of Gold or Silver Bullion. You should perform your own due diligence and consult with an investment advisor before investing.

Comments

[Smarty_Pants:]

"I think that markets are stronger than governments and the inflationary attempt will fail." - Angel Martin

Angel, it's nice to see someone with such a positive outlook. I sincerely hope our economic troubles can return to "normal", but my study of Austrian economic theory and history lead me to a different conclusion. While I cannot tell you exactly what will transpire in the future, I can say that I believe we will either experience extreme inflation or a recession/depression. The odds of a happy ending are incredibly thin.

By the way, the value of the dollar has declined by 96% since the FED was established in 1913. Seems like they've been pretty successful at creating inflation over the long run.

Jun 21 10:59 PM

[Tunc K.:]

buy gold not to be poor, not to be rich.
Thank you for your article.

Tunc K.

Jun 22 03:26 AM

[Living4Divi...:]

Hi Cameroni - Thank you for your compliment on the article and a BIG Thank You for your post. I tried to express that rationale in the opening paragraph of this article. You put it beautifully.

On Jun 21 04:23 PM cameroni wrote:

> Owning gold and silver coins and bullion is an expression of the
> lack of faith many of us have in government policy. It is money.
> It is also a defacto vote on destructive policies. It represents
> real savings and although it may not earn interest we are hopeful
> it will retain buying power for the future. Like squirrels storing
> up food for the winter, gold bugs want to know there is something
> of value on the shelf should truly bad days ever arrive. I err on
> the side of caution ensuring I have some just for insurance purposes.
>
>
> Good points by the way. I like the way you summed it all up.

Jun 22 07:53 AM

[Living4Divi...:]

User 384743 - Thank You for pointing out the very real dangers in conventional investing paradigms. In the example of EMH, it was introduced, became gospel and attracted Trillions of Dollars in followers, and was later bashed.

There are sensible investing paradigms which have withstood the test of time. The paradigms are hard to isolate from the clutter. I make my judgements based upon the evidence and the fact at the time.

On Jun 21 03:09 PM User 384743 wrote:

> Your article portrays many of the modern day analysts theories and
> these will soon be shown incorrect. Todays liberal/progressive ideas
> will be cast into reality soon and only then will the truth unfold.
> We now live in a totally corrupt world where our governments and
> markets simply spin the shambles of reality into that environment
> we wish were occuring.

Jun 22 08:07 AM

[Living4Divi...:]

Gold Barron - please help me out and show me where I have made contradictions.


On Jun 21 03:36 PM Gold Barron wrote:

> Im sorry but your article is silly and you contradicted your own
> points numerous times.
>
> Gold will not buy happiness but it will pay for alot of grief.

Jun 22 08:08 AM

[Living4Divi...:]

Thanks BadScooter !

Speaking of GOLD BUG - how about the first image of my article? Did anyone not get it?

On Jun 21 05:26 PM badScooter wrote:

> Cameroni, I appreciate your above comments, well said.
>
> Living4Dividends, thanks for your elucidation. I suppose I would
> be considered a "gold bug" by others, but I really don't feel a particular
> attrraction in and for itself. It is nice to see your position staked
> out such that it is not inflammatory; it is important for folks on
> both sides of the "gold issue" (why is this an issue?!) to understand
> the logic of the other, in order to stay balanced.
>
> Myself, Cameroni made a succinct statement which sums me up very
> nicely. I like PMs as a way of "voting with my wallet".

Jun 22 08:12 AM

[Living4Divi...:]

buddhabill - all commodities and PMs swing wildly. As I am sure the others will attest, there have been times in the past where Gold had less purchasing power than it did 10 years prior.

On Jun 21 07:12 PM buddhabill wrote:

> I cannot see a reasonable argument that in, say, 10 years an ounce
> of gold will have less purchasing power than it does today. Next
> month, next year, who knows.
>
> Same thing with a barrel of oil, or a bushel of corn, or a pound
> of uranium - all commodities I believe have more long-term upside
> and more utility, but far less portability.
>
> Will other asset classes out-shine gold (or silver, which I am beginning
> to lean towards because of superior utility and accessibility in
> the event of a price surge) over the next 10 years? Undoubtedly -
> perhaps mining stocks themselves. But the beautiful thing about commodities
> is that you don't have to pick the right company or brand; and in
> an increasingly 'virtual' world the perceived value of something
> that one can actually OWN (i.e. hold or wear) will be of great comfort
> to literally billions of people. This is the ultimate utility.<br/>
>

Jun 22 08:15 AM

[Living4Divi...:]

Nathaniel C - In a recent article by Robert Martorana in seeking Alpha, it is shown that Marc Faber has destroyed much of his credibility by making unfounded assumptions and using faulty data.

seekingalpha.com/artic...


On Jun 21 08:21 PM Nathaniel C wrote:

> Marc Faber said it best "when you own gold, you become your own central
> bank." Meaning that you do not have to rely on the full faith and
> credit of the Federal Reserve or Bank of England. It gives you a
> certain amount of independence from the criminal central banks who
> intentionally devalue their currencies every year. You are correct
> that gold is not a great investment, but that it because gold is
> a store of value--big difference. You dont get rich quick by owning
> gold, instead you maintain your purchasing power. That is the best
> thing about gold.

Jun 22 08:22 AM

[Robert262:]

I also believe that history has a habit of repeating itself. After WWI, Germany which prior to was the richest nation on the planet, became indebted/reliant to vurtually every other nation. As you know the League of Nations made Germany responsible for the entire debt incurred during the war. She literally transferred her entire net worth to the allies. Hindered by the treaty, Germany was not producing any net worth, instead watching her level of debt increase geometrically. Although there was a sense of false prosperity in the '20's, when the depression hit, Germany suffered far worse than everyone else. The Wiemar Republic was printing money as fast as they could, but evenually a German needed a wheel barrel to carry enough currency to buy a loaf of bread.
The United States, who during the war sold armaments "stuff" to everyone became the true winner. England, France, Germay, etc., became beholding to the US. We held the debt, we made the stuff, and we became the World's SuperPower.
I look at China as "us" after WWI. Now the perception is that China needs us because we buy their stuff, but did we need the world after WWI? Yes and No. The world needed us far more. Remember that every dollar that goes to China is funneled through Norinco (Chinese Military industrial complex) first, and war is the only true recession proof business.
The true price of Gold is whatever anyone is willing to pay for it, but in the '20's, I would not have wanted to be holding onto Deutch-Marks unless I could bite down on a gold one.

Jun 22 10:29 AM

[Living4Divi...:]

Angel - Yes. In many but not all ways, the markets are stronger than the Government. Remember, the bond traders were the ones who forced Bill Clinton to scale back his ambitious plan for public investments in education and health care. This was after Clinton insisted that his budget wasn’t going to be “held hostage to some *@?#»! bond traders.”

However in terms of creating inflation, you are sadly wrong. Under the tyranny of the current fiat regime, if a Government wants to create inflation, it will create inflation.

Smarty_Pants comments put it succinctly. Thank You, Smarty_Pants

On Jun 21 10:04 PM Angel Martin wrote:

>
> I think that markets are stronger than governments and the inflationary
> attempt will fail. In such a scenario, there would be no alternative
> to debt liquidation and severe deflation would follow.

Jun 22 10:46 AM

[Angel Martin:]

I agree that governments have created inflation to the tune of 90-95% loss of purchasing power over the last 100 years. My comment about markets more powerful than government was more directed to a debt crisis, where the government may want to inflate away an unsustainable debt, but bondholders want to preserve their wealth. Hyperinflations do happen, but I think everyone should ponder why all prior depressions have taken a deflationary course.


On Jun 22 10:46 AM Living4Dividends wrote:

> Angel - Yes. In many but not all ways, the markets are stronger than
...
> > Smarty_Pants comments put it succinctly. Thank You, Smarty_Pants
>

Jun 22 12:25 PM

[Angel Martin:]

The suggested sequence of events is a bit off here. The Weimar hyperinflation was in 1923. The Depression in Germany was deflationary. Germany was heavily dependent on foreign creditors, inflation was not an option during the Depression (the example of Germany during the Depression is one reason why I think that if we are entering a Depression now, it will take a deflationary course.)


On Jun 22 10:29 AM Robert262 wrote:

> I also believe that history has a habit of repeating itself. >
...
Although there was a sense of false prosperity in the '20's, when
> the depression hit, Germany suffered far worse than everyone else.
> The Wiemar Republic was printing money as fast as they could, but
> evenually a German needed a wheel barrel to carry enough currency
> to buy a loaf of bread.
>

Jun 22 12:33 PM

[Plebian:]

1a. "Gold has tripled in price."
1b. "See cure #9 above. Over the long term other asset classes have far outperformed gold."
Resp: Only because gold has been manipulated down.

2a. "There will be a rally in gold."
2b. "This is merely speculation. No one knows the future price of gold. If they did, they wouldn't be telling the world. Avoid the hype."
Resp: The 'price' of gold is not nearly as important as its store of value. Why do you assume that people who know gold would keep quiet and not share the good news?

3a. "All global currencies will devalue. No currency will be safe."
3b. "See cures #3 & #4 above. There are far better ways to protect against inflation"
Resp: Is any other commodity as liquid as gold? Why do you think central banks hoard gold?

4a. "Governments can't be trusted to keep assets safe"
4b. "But can your neighbors or local thugs be trusted? Can the ETF issuer be trusted? See cures #6 and #7. Furthermore when you can't trust one government or institution, then diversify your assets among several governments and institutions."
Resp: Why should anyone trust any of them, when there's gold and silver to trust in. (And why are ALL of them against people investing in gold and silver? Because they see it as competition!)

5a. "Gold is a good diversifier."
5b. "Gold is a good diversifier, but there are other assets that diversify even better, and pay interest or nifty dividends. See cures #5 and #9."
Resp: It's not a matter of diversification as much as which asset is deemed safer. There is safety in physical gold and silver.

6a. "Smart people buying gold"
6b. "Just as many other smart managers are saying "Don't Buy Gold""
Resp: Name 6 'smart' people who are saying "Don't Buy Gold", and we'll all be the judge of how smart they are.

7a. "Worldwide / local collapse of governmental and / or financial institutions"
7b. "Financial Armageddon is not coming. In the U.S., the rule of law is mostly intact. (except for the GM incident)"
Resp: Study history and learn the truth, that's all that needs to be said.

Jun 22 06:22 PM

[Living4Divi...:]

Angel - All Depressions WERE deflationary, up until the last depression one 29-early 30's. Depression = severe recession.

Something changed since then. US went OFF the Gold Standard, specifically to fight deflation during recessions/depressions.

We haven't had a deflationary recession/depression since then, thanks to the power of fiat currency.



On Jun 22 12:25 PM Angel Martin wrote:

> I agree that governments have created inflation to the tune of 90-95%
> loss of purchasing power over the last 100 years. My comment about
> markets more powerful than government was more directed to a debt
> crisis, where the government may want to inflate away an unsustainable
> debt, but bondholders want to preserve their wealth. Hyperinflations
> do happen, but I think everyone should ponder why all prior depressions
> have taken a deflationary course.

Jun 22 09:44 PM

[Living4Divi...:]

Plebian - apparently you didn't read my article carefully.
Re-read the first paragraph: "The Only Valid Reasons to Buy Gold"

Then, stop reading.

You have already made up your mind.


On Jun 22 06:22 PM Plebian wrote:

> 1a. "Gold has tripled in price."
> 1b. "See cure #9 above. Over the long term other asset classes have
> far outperformed gold."
> Resp: Only because gold has been manipulated down.
>
> 2a. "There will be a rally in gold."
> 2b. "This is merely speculation. No one knows the future price of
> gold. If they did, they wouldn't be telling the world. Avoid the
> hype."
> Resp: The 'price' of gold is not nearly as important as its store
> of value. Why do you assume that people who know gold would keep
> quiet and not share the good news?
>
> 3a. "All global currencies will devalue. No currency will be safe."
>
> 3b. "See cures #3 &amp; #4 above. There are far better ways to protect
> against inflation"
> Resp: Is any other commodity as liquid as gold? Why do you think
> central banks hoard gold?
>
> 4a. "Governments can't be trusted to keep assets safe"
> 4b. "But can your neighbors or local thugs be trusted? Can the ETF
> issuer be trusted? See cures #6 and #7. Furthermore when you can't
> trust one government or institution, then diversify your assets among
> several governments and institutions."
> Resp: Why should anyone trust any of them, when there's gold and
> silver to trust in. (And why are ALL of them against people investing
> in gold and silver? Because they see it as competition!)
>
> 5a. "Gold is a good diversifier."
> 5b. "Gold is a good diversifier, but there are other assets that
> diversify even better, and pay interest or nifty dividends. See cures
> #5 and #9."
> Resp: It's not a matter of diversification as much as which asset
> is deemed safer. There is safety in physical gold and silver.
>
> 6a. "Smart people buying gold"
> 6b. "Just as many other smart managers are saying "Don't Buy Gold""
>
> Resp: Name 6 'smart' people who are saying "Don't Buy Gold", and
> we'll all be the judge of how smart they are.
>
> 7a. "Worldwide / local collapse of governmental and / or financial
> institutions"
> 7b. "Financial Armageddon is not coming. In the U.S., the rule of
> law is mostly intact. (except for the GM incident)"
> Resp: Study history and learn the truth, that's all that needs to
> be said.

Jun 22 10:09 PM

[Living4Divi...:]

(Response to Plebian, continued)

Plebian - In the same sense that it futile for you to continue reading the rest of the article, it is futile for me to argue with your particular brand of logic. Therefore, I stop the dialogue.

Jun 22 10:50 PM

[Angel Martin:]

I don't think the link to gold explains the deflation. The UK went off the gold standard in Sept 1931, yet had significant deflation in subsequent years. Japan had significant deflation in the 1990s without any link to gold.

I think the deflation is explained by the behavior of investors to avoid losses due to either default or inflation.

"Flight to quality" causes credit market lockup and deflation.

"Flight from inflation" causes a spike in interest rates that MAY cause so much economic pain (worse in a more heavily indebted economy) that the stimulative effect from inflating away the debt burden gets cancelled out.


On Jun 22 09:44 PM Living4Dividends wrote:

> Angel - All Depressions WERE deflationary, up until the last depression
> one 29-early 30's. Depression = severe recession.
>
> Something changed since then. US went OFF the Gold Standard, specifically
> to fight deflation during recessions/depressions.
>
> We haven't had a deflationary recession/depression since then, thanks
> to the power of fiat currency.
>

Jun 23 12:15 PM

[Living4Divi...:]

the us dollar was devalued with respect to gold from 1931 to 1971 in a series of progressive steps. 71 was when the final blow came that divorced the dollar completely from gold.


On Jun 23 12:15 PM Angel Martin wrote:

> I don't think the link to gold explains the deflation. The UK went
> off the gold standard in Sept 1931, yet had significant deflation
> in subsequent years. Japan had significant deflation in the 1990s
> without any link to gold.
>
> I think the deflation is explained by the behavior of investors to
> avoid losses due to either default or inflation.
>
> "Flight to quality" causes credit market lockup and deflation.
>
>
> "Flight from inflation" causes a spike in interest rates that MAY
> cause so much economic pain (worse in a more heavily indebted economy)
> that the stimulative effect from inflating away the debt burden gets
> cancelled out.

Jun 23 01:46 PM

[Stock Resea...:]

Nice Article!! This is a well-written, dispassionate article about Gold.

If gold is an inflation hedge can anyone tell me why the price has been dropping lately?

Jun 27 01:33 PM

[ScroogeMcduck:]

12. There is a finite supply of gold

Jul 15 01:05 PM