Gold: How the Mainstream Gets It So Wrong 30 comments
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In investing it pays to be calm, scientific, and objective. Here at the Rayno Report we believe in looking at and analyzing data. You're heard about gold the "barbaric relic," yes? The asset that pays no interest? For years I've been perplexed by the mainstream media's skepticism of the gold rally, so I decided to look more closely at the data.
It turns out that public perception and mainstream TV commentators have had things entirely wrong. Data shows that gold has been outperforming equities for the last 40 years. Gold today is at $1,050. That’s 30X times the gold price of $35 in 1971, when the United States went off the gold standard. That represents a 3,000% gain. The Dow Jones Industrial Average (DJIA) in 1971 traded around 900. It’s now 10,000. That’s a gain of about 10X, or 1,000%, over the same period of time. Gold has outperformed the DJIA by a factor of 3 since coming off the gold standard.
For whatever reason, the mainstream media, the government, the investment banks, and even many Americans appear to have a hard time accepting this. Maybe it's because it's harder for them to make money trading gold than it is floating speculative IPOs. For now, you can ignore the clucking of the TV commentators who fear gold is a “dead asset” that pays no interest. Not even close.
In fact, they are still getting it wrong. Mainstream "pundits" like Larry Kudlow and Henry Blodget still scoff at the gold rally, raising eyebrows. It's as if they don't understand that politicians want to print money.
Let’s drive home the point. Let’s say the day the U.S.went off the gold standard, in 1971, you invested $100,000 in gold and $100,000 in the DJIA. The gold portfolio today would be worth about $3 million. The portfolio of DJIA-indexed stocks would only be worth $1 million.
What gives? How did this happen? From 1880-1935, the United States was locked on to the gold standard at a price of $21/ounce. Those were the days of monetary stability, fiscal discipline, and sanity. Because the U.S. currency was backed by gold, it meant that the government could not randomly print money when it felt like it. It needed to acquire more gold before it printed money
To make things more convenient, the FDR administration, under Executive Order 6102, confiscated gold by making it illegal to own in 1933 (see here (.pdf)).
Having a gold standard causes real problems when you are in a fiscal mess. It means you cannot print money to alleviate debts, because a gold standard means that your currency "anchored" to gold. It installs monetary discipline, which politicians absolutely despise. So, in 1971 Nixon, causing shock and awe around the world, cancelled the gold standard, essentially ending the Bretton Woods system of global currency standards that had existed since 1944. Oddly, market prices prior to the end of the gold standard had been gradually creeping up prior to the “Nixon Shock,” almost as if people “knew” what was going to happen.
Since 1971, gold has been allowed to float by “market prices” and without a gold standard has essentially allowed an entire new economic era of fiat money, famously championed by former Federal Reserve Chairman Alan Greenspan who called gold a “barbaric relic.” What’s interesting is that the barbaric relic is now having its day. It’s almost as if the gold market is flipping Alan Greenspan the bird. Since the elimination of the gold standard, it has surged massively.
Even with these volatile spikes and collapses (make no mistake about it, short-term gold moves can be violent), the long-term trend has been a steady march up. Even when the gold price hit its bear-market low in 2000 at $260 per ounce – when tech stocks were the rage and gold was at its nadir in the public’s investing mind – it was was still 7X higher than it was on the gold standard. This make sense. Inflation was low. The tech boom was increasing productivity and the world thought we’d entered some sort of utopian “new paradigm.” Sentiment about gold was at a low. Gold has, in fact, always served its purpose as a store of value in the face of fiat money. Yes, there was a decade in which gold did nothing – the 1990s. That’s called a bear market. Just as equities have done nothing for the last ten years. But if you look at a longer series of data – the last 40 years – it’s starting to look like gold has a better track record.
Is this really so surprising? I think it makes perfect sense. Gold’s “real market” performance – in the post gold standard regime -- shows that in a fiat money system, the government will print money irresponsibly, and gold will serve as protection against this. A 3,000% gain does miracles for insuring against inflation. (The dollar has declined approximately 90% in value since the end of the gold standard). Remember how much a Coke was in 1979? It's interesting that since 1971, gold has been a better inflation hedge than equities.
Now, I still believe in equities. Investing in great companies is a good idea. But I think the track record of fiat money and gold shows that a diversified portfolio must include gold. The data shows that gold is an essential asset class for most investors because of its power to preserve value in the face of currency debasement. It’s your insurance against irresponsible government fiscal policy. The government prints money, and gold goes up. In the days of a non-gold standard, that’s almost guaranteed.
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This article has 30 comments:
www.elliottwave.com/r....
Of course brokerage commissions would trim that, but not as badly as carrying costs for gold would hurt that position. When you own physical gold you
Dividends and carrying costs are relevant; but of greater importance is the fact that the Dow Industials of 40 years ago isn't comprised of the same companies as today's.
Losers and failures constantly fall out of the Dow indices and are replaced with current winners. Money invested in the shares of the wrong company can be a total loss - gold has never been worthless.
On Oct 25 01:48 PM taxpro wrote:
> Had you bought gold in 1971 and held to the present, you have a good
> gain. However, if you bopught gold in 1981, it would have been a
> long painful wait and the results would be less impressive.
Sure, you should invest in dividend-paying stocks.
The main conclusion I have drawn is that it's essential to hold some gold in your portfolio -- maybe even more than the 10% that some asset managers recommend -- especially egiven the risks of the current monetary climate.
The power of reinvested dividends is POWERFUL
jeremy siegel says since 1900 it was 97% of the dows gain
In 1971 the market was grossly overvalued but FACTOR in the REINVESTED DIVIDENDS and then check your overall return HUGE DIFFERENCE
In 1990 Gold was 400 less than half of its 1980 high
Gold is now up about 150%
Coke was 5 dollars a share .its up 1100% + the dividends have ranged from 3% in the first year to 32% of the original purchase price
When factoring in the reinvested dividends it SWAMPS GOLD
Read Jeremy Siegels study of the power of reinvested dividends
The system will make you financially independent I know because it happened to me
In case you did not know.peace
I am no economic historian, but just a quick search finds that there were major Panics in 1884, 1893 and 1907. According to the book "The Panic of 1907: Lessons Learned from the Market's Perfect Storm" - Stock market crashes and banking panics had surfaced periodically in the United States and elsewhere throughout the nineteenth century.
Panics and crashes are caused by human character failings including excesses of greed and irresponsibility.
Neither the Federal Reserve nor a gold standard are magic bullets. We have to get grip on ourselves and improve our moral performance. No system will be effective against determined and creative efforts to game it.
The fault lies in ourselves and that is where we must turn to correct it.
With the central banks running out of "ammunition" to use in their shorting and bullion dumping, and with Asian buying set to become more and more dominant as wealth continues to move to the East, gold will soon rise to its real value.
Meanwhile, with the U.S. economy in its worst condition in history, and with no possibility of servicing its roughly $60 trillion in total public/private debt, it's either default or hyper-inflation (and then default) ahead for the U.S.
In the first scenario, the Dow goes below 5,000. In the second scenario, the Dow goes to 30,000 or 40,000 first - but the shares aren't worth anything.
On Oct 25 02:38 PM tew wrote:
Gold hasn't destroyed somebody's retirement and life savings like the cronies that ran these companies have. Gold is an insurance policy not only against irresponsible fiat overlords but also the overpaid crooks at the top of the corporate ladder. Gold is a hedge against human nature and our leaders' propensity for greed, recklessness and fraud.
On Oct 25 02:54 PM Screwloose wrote:
>
> Dividends and carrying costs are relevant; but of greater importance
> is the fact that the Dow Industials of 40 years ago isn't comprised
> of the same companies as today's.
>
> Losers and failures constantly fall out of the Dow indices and are
> replaced with current winners. Money invested in the shares of the
> wrong company can be a total loss - gold has never been worthless.
In a country with shrinking resources, and an increasing population, the only healthy economy will be a contracting economy. Say the same thing for the entire planet. You can't draw blood from a turnip, even if you're Barach Obama waving a Nobel Peace Prize around in one hand and a Wimbledon Men's Singles Trophy around in the other (he'll probably win one of those, too, so we'll just list it now).
People will grow in their ability to do more with less. Our fat kids will either get less fat or we'll have a lot fewer of them. The population will decrease due to illness, war, or want.
Kudlow's growth dictum only works if we master alchemy.
Anyone who wants to point out the "if you bought gold in 1979" argument should also be giving fair play to the "if you bought the Nasdaq/Dow in 2000" or "if you bought the Nikkei in 1989" arguments.
Nasdaq peaked at 5048, currently trades at 2154 (down 57.4% after 9+ years).
Dow peaked at 11,727 in 2000, currently at 9,972, (down 15% in 9+ years.)
Nikkei peaked at 38,915, currently trades at 10,355 (down 73.4% after 20 years).
Also, if you want to compound dividends, don't forget to 'uncompound' the dividends you sent to Uncle Sam with your 1040 forms all those years. Dividends are taxed as regular income, so recalculate those gains assuming that 25% of the dividends issued aren't reinvested because the taxman took them.
It's not my intent to bash the gold nay-sayers or dividend re-investors. They make valid points. Not all investments are the same, nor are all investors the same.
Let's all try to learn something useful from what others know, even if we don't think it's our first choice for our own funds.
The one point the author makes that's carved in stone is that paper money will always lose value over time as more of it is printed.
"Paper money eventually returns to its intrinsic value - zero."
-- Voltaire (1694-1778)
> In the first scenario, the Dow goes below 5,000. In the second scenario, the Dow goes to 30,000 or 40,000 first - but the shares aren't worth anything.<
I think its possible the stage is set for the first scenario. If there's a sudden and unexpected resurgence in the dollar, the Dow would almost certainly head lower. There's every possibility the resurgence in the dollar "could" be quite impressive too, but ultimately, temporary.
What I'm seeing is the very real possibility of a relatively short and possibly violent period of deflation first, which would absolutely be followed by a mind boggling period of inflation. In that inflationary scenario, the Dow would indeed go to perhaps the moon but as Jeff points out, valued in dollars that are not worth anything.
If we only knew how it's going to unfold, we could all do very well in both directions.
is the best thing I have ever read to understand
money and gold. Gold has been the best store of value for thousands of years and is being recognized and utilized as that again. And now the fiats are being seen for what they are, worthless paper. And all paper ... bonds, stock certificates, are all vulnerable. But read "fofoa" if you are serious.
US corporations today pay peanuts for dividends if anything and when you buy stocks in the US markets you depend on the greater fool theory of some sucker actually paying more than you did and this may not be the best way to protect and preserve your wealth that was probably earned through sound investing in the past.
Maybe you did not notice to what happened last Oct and again in Mar and will happen again soon. Stocks can become near worthless just like the US $
Maybe Coke is way up, but you forgot to mention how much GM, AIG, C, F, MSFT etc etc are up. You just keep holding your worthless pieces of paper paying some paltry dividend and I'll hold my gold, because the world changed radically last year and you better open your eyes to that fact.
On Oct 25 05:11 PM bobbybutte wrote:
> In case you are not "joking" let me let you in ona secret
>
> The power of reinvested dividends is POWERFUL
>
> jeremy siegel says since 1900 it was 97% of the dows gain
>
> In 1971 the market was grossly overvalued but FACTOR in the REINVESTED
> DIVIDENDS and then check your overall return HUGE DIFFERENCE
>
> In 1990 Gold was 400 less than half of its 1980 high
>
> Gold is now up about 150%
>
> Coke was 5 dollars a share .its up 1100% + the dividends have ranged
> from 3% in the first year to 32% of the original purchase price<br/>
>
> When factoring in the reinvested dividends it SWAMPS GOLD
>
> Read Jeremy Siegels study of the power of reinvested dividends<br/>
>
> The system will make you financially independent I know because it
> happened to me
>
> In case you did not know.peace
It was Keynes, and he called it a "barbarous relic."
> "Greenspan who called gold a “barbaric relic.”"
>
> It was Keynes, and he called it a "barbarous relic."<
Both are wrong. Those terms refer to Dick Cheney.
> Good Article - Gold and Silver will always be considered an international
> currency even if not recognized by the government. It is interesting
> to note that 100 years ago 1oz of gold bought a nice suit as does
> 1oz of gold buy today. If you had kept that money in the USD you
> would only retain the purchasing power of approx 5 cents (you would
> need 20x as much fiat money today to buy the same product).<
It is also claimed that it purchased a suit of armor in the days of the Romans. Pretty conclusive evidence that if nothing else, gold is a true preserver of wealth. In that regard, why gold isn't considered as the one and only true currency is beyond me. It is!
By the way, could you please shift your camera a wee bit to the right. I've always been attracted to lovely brunettes.
Gold, in particular, seems quite irregular-- even irratic-- in performance comparison. But gold really only appears on our radar screens in times of more severe financial instability; currency crises, wars, "Black Swan" events. When the real or perceived crisis passes, gold fades from thoughts and investment portfolios.
The case for gold at this moment in history would seem clear-- the world has never seen this kind of financial shakiness. More than one nation is perceived as being a bit too close to the brink of financial chaos. Indeed, the world's "reserve currency" is thought by many to be undergoing a deliberate debasing. Others believe it is not so much deliberate as beyond control-- after all, it is backed by none other than the biggest debtor nation in history, and that debt has reached a percentage of GDP that, if history is our guide, suggests the dollar is doomed to eternal rest in the fiat money cemetary.
What should rational persons think when the world's greatest debtor , after giving away cars and $8k homebuyer gifts, now proposes a trillion-dollar health care program rather than cutting back on spending ? They must think us to be completely insane. And if we are....what about our currency now inspires confidence ?
If people even suspect that the dollar could really be on the way to "money heaven", the logical next question is "Then....what ?" Well....."Financial chaos and commotion" may be the most common answer, and while not particularly helpful, it is illuminative in that it leads to the next course of action-- buying gold.
Gold does well during times of financial uncertainty and instability, which seems to be the state of things. That makes physical gold both an "insurance" policy and a momentum play. It seems unlikely that the situation will turn around suddenly. Or soon.
But irresponsible monetary policy actually increases reckless behaviour.
On Oct 25 06:16 PM mplaut wrote:
> " From 1880-1935, the United States was locked on to the gold standard
> at a price of $21/ounce. Those were the days of monetary stability,
> fiscal discipline, and sanity."
>
> I am no economic historian, but just a quick search finds that there
> were major Panics in 1884, 1893 and 1907. According to the book "The
> Panic of 1907: Lessons Learned from the Market's Perfect Storm" -
> Stock market crashes and banking panics had surfaced periodically
> in the United States and elsewhere throughout the nineteenth century.
>
>
> Panics and crashes are caused by human character failings including
> excesses of greed and irresponsibility.
>
> Neither the Federal Reserve nor a gold standard are magic bullets.
> We have to get grip on ourselves and improve our moral performance.
> No system will be effective against determined and creative efforts
> to game it.
>
> The fault lies in ourselves and that is where we must turn to correct
> it.
Also, the dollar has declined 90% since we went off the gold standard.
Do you think these data points are arbitrary, or coincidental? Do you really think it's coincidence that when we want off the gold standard, it was price at $35, and now it's priced at $1,050?
Where did all that "extra" money go (the inflation). Does it go into your pocket or the pocket of politicians, lobbyists, and leveraged investment bankers? My guess is the latter three.
On Oct 26 03:32 AM Mr. Ed, Jr. wrote:
> Pick any investment and any starting point at random and there will
> be many better investments for that time period. Timing really is
> everything.
>
> Gold, in particular, seems quite irregular-- even irratic-- in performance
> comparison. But gold really only appears on our radar screens in
> times of more severe financial instability; currency crises, wars,
> "Black Swan" events. When the real or perceived crisis passes, gold
> fades from thoughts and investment portfolios.
>
> The case for gold at this moment in history would seem clear-- the
> world has never seen this kind of financial shakiness. More than
> one nation is perceived as being a bit too close to the brink of
> financial chaos. Indeed, the world's "reserve currency" is thought
> by many to be undergoing a deliberate debasing. Others believe it
> is not so much deliberate as beyond control-- after all, it is backed
> by none other than the biggest debtor nation in history, and that
> debt has reached a percentage of GDP that, if history is our guide,
> suggests the dollar is doomed to eternal rest in the fiat money cemetary.
>
>
> What should rational persons think when the world's greatest debtor
> , after giving away cars and $8k homebuyer gifts, now proposes a
> trillion-dollar health care program rather than cutting back on spending
> ? They must think us to be completely insane. And if we are....what
> about our currency now inspires confidence ?
>
> If people even suspect that the dollar could really be on the way
> to "money heaven", the logical next question is "Then....what ?"
> Well....."Financial chaos and commotion" may be the most common answer,
> and while not particularly helpful, it is illuminative in that it
> leads to the next course of action-- buying gold.
>
> Gold does well during times of financial uncertainty and instability,
> which seems to be the state of things. That makes physical gold both
> an "insurance" policy and a momentum play. It seems unlikely that
> the situation will turn around suddenly. Or soon.
As our financial leaders continue to defraud us, and as we move toward a delinking of the dollar from oil, gold is looking better and better.
On Oct 25 11:14 PM Roger Knights wrote:
> "Greenspan who called gold a “barbaric relic.”"
>
> It was Keynes, and he called it a "barbarous relic."<
Both are wrong. Those terms refer to Dick Cheney.
============
The author I was correcting referred to Greenspan's comment in a way that implied or suggested that he was the originator of the epithet. He wasn't; it was Keynes. I'm certainly not "wrong" about that. ;;;
... Ooh--now I get it--it was a joke. (Cheney is the barbarous/barbaric relic.)