Picking Apart the WSJ's Manipulative Gold Reporting

Wall Street Journal writer Eleanor Laise delivered an exemplary piece of manipulative journalism on Tuesday. While banks and investment funds announce losses of billions of Federal Reserve Notes on a by now daily basis, Laise worries in her headline "How To Survive The New Gold Rush" on the day gold hit a new record high at $933 as investors seek shelter from the debt-hurricane engulfing the world.

The scary headline, in stocks it's always just about "weathering the storm," is followed by a couple of good examples where I can highlight the methods used by journalists to shape X into U.

Manipulation #1: "The New Gold Rush" The rush into the only asset class that is not somebody else's obligation is not exactly new. Only because major banks (and MSM who believed into banks' permanently wrong forecasts) missed the train in the first six years does not eliminate the fact that gold has gone almost fourfold since it bottomed out at $252. It has performed better than any other asset class in this period except commodities which show the true levels of inflation.

Manipulation #2: In order to keep the gold bull in the WSJ's bear dress the admission,

"Gold has been riding its reputation as a safe haven to new highs"

is immediately followed by the unsubstantiated warning,

"But it also carries substantial risks for investors."

Where is the substantial risk in an asset that does not depend on the future performance of somebody else? Did gold ever decline to zero like Enron and Worldcom did and which will happen to so many other former pillar of US industry in the close future? I think there are many other asset classes where the WSJ could apply the art of protecting investors by informing them with the same skepticism the paper has towards gold.

To back up the unwarranted claim of risk Laise begins to mix apples and pears for her comparison, blanking out gold's stellar performance in 2008 in order to maintain a quote a financial advisor who should check his calculator. This leads to

Manipulations #3 and #4:

"A dollar invested in gold at the beginning of 1969 would have grown to less than $20 by the end of last year, compared with nearly $50 for the S&P 500, according to the firm,"

she quotes some little-known financial advisor. Why does a daily paper quote prices from a month earlier, after using current prices earlier on? It can't have been a problem of a lack of computing power or limited fact-checking capacity, I presume.

Despite this manipulation this financial advisor and the WSJ are still plainly wrong and misleading: A 20-fold increase since 1969 would put gold at $700. But it closed 2007 at $838. So gold has gone up almost 24 times since 1969. I wonder why this beginning date was chosen? The USA was still on the gold standard then.

GRAPH: Gold from 1975 to 2008. Why do all gold thrashers assume that all gold investors rushed into the market at its old high? Except when applying the highly unlikely thesis that gold bugs bought then and never sold out all other investment periods now rank gold again as the best performing asset in the short, medium and long term. Chart courtesy of Kitco.

I also wonder how this financial advisor arrives at the conclusion that a rise from 100 to 1,350 points in the S&P 500 represents a 50-fold increase as it is very simply not the case. He has to overstate the performance of stocks by more than 300% in order to make gold look bad.

On a general note it is very interesting that the paper asset-cheering crowd always assumes that every gold investor was so stupid to buy his gold at the old record of $875 in 1980. This was not possible either since gold spiked only intraday to this level.

The official fixing prices never went higher than $760 and most physical business at that time was cash-transacted on the closing prices.

I faintly remember online derivatives investing from home with funds drawn from a debt card was not an option then. Buying gold always meant feeling a heavy piece of the metal in one's hands.

Manipulation #5: As the meteoric rise in gold cannot be hidden, the proven method of mixing apples with pears for a good biased comparison is drawn. Buying gold and buying gold stocks are two entirely different things. Again, only physical bullion is a store of value whereas mining shares come with all the risks of corporate failure as all other stocks. The story fails to back it up with data. Why? Because gold share indexes have outperformed most other industries in this millennium. The Amex GoldBugs Index has risen 13-fold since 2001 and is still more than double compared to 1998. Omitting facts is the most used method to keep a story's spin.

Manipulation #6: In her desperation to trash gold's out performance of everything else Ms. Laise uses the same trick the WSJ used in order to teach us in the not too distant past that record nominal oil prices were not that bad when seen inflation-adjusted. So she writes

"What's more, gold has failed to keep pace with inflation in recent decades. The average 1980 price of gold inflated to 2007 dollars would be $1,563 an ounce, well above today's price, says Brad Zigler, managing editor of Hardassetsinvestor.com."

IMHO the other side of this medal is that gold is still undervalued and the gold price has always kept up with inflation in the last 3,500 years. To pick out a recent under performance in a 3,500 year old correlation is, again, one more way of manipulation. Business journalists normally love to spot undervalued investment instruments. There is also no mentioning that central banks have been selling record amounts under the central bank gold sales agreement, dumping up to 500 tons per year on the market and suppressing the gold price.

Manipulation #7: Thank god there is always the trick of the general quote. Nothing is more convenient than quoting a group of anonymous people. Here we go:

"Gold can help investors diversify and reduce their overall portfolio risk, financial advisers say, since it tends to behave differently than stocks. But at current levels, investors may be paying a high price for that diversification."

I need help to follow this reasoning. Should I now avoid gold because it has underperformed inflation recently? Or should I shun the yellow metal because it has risen so much?

Manipulation #8: Next comes the implication that gold investors are eccentric wackos (as in stark contrast to the herd of market players that always act rational, driving shares up and down in 20% ranges these days.)

Again using the convenience to quote anonymous financial advisers, Ms. Laise presents gold bugs as a crowd one does not really wish to be associated with.

"Financial advisers also warn that since gold is considered a haven in times of crisis -- and is less in demand for practical uses than other commodities such as copper and oil -- it tends to attract emotional, speculative investors who can amplify its price gyrations."

And what are the big guys on Wall Street doing these days, sending the Dow hundreds of points up and down within an hour?

Maybe the WSJ will cease all mining share reporting once it finds out that gold investors (like active military personnel) would elect Ron Paul for president. And shouldn't gold be outlawed anyway as it is also favored by Muslim and Chinese investors (driving prices up in their move out of FRN's?) It would fit the other quirky arguments displayed in this article. No, I deny that this was polemic. And I am backed by a group of financial advisers that say so too.

Manipulation #9: If your are still not scared enough, beware of something not one analyst expects. But the WSj holds up the FRN flag, claiming "some" market watchers claim a dollar restrengthening,

"Some also see risks to gold investors in the current market. The dollar's long decline may be near an end, some market watchers say, and if it rebounds, that's likely to hurt gold."

Manipulation #10: Omitting the positives for gold. Inflation, record commodity prices, new demand from China, Russia's declining gold exports, America losing 2 wars, the real estate crisis, investors only beginning to pile into precious metals; not that the WSJ would know anything about that - or share it with its readers. That's all worth a short sentence:

"An increasingly cloudy financial and economic picture and geopolitical tensions have also helped to spur gold to new highs."

A simple Google search returns more positive aspects of gold investing - and would have led the WSJ writer to contacts with gold experts. She preferred not to talk to a single one, sticking to some generalists instead.

As not even such stories will slow the solid bull market in the oldest universal currency of the world I have a tip.

The next story should not miss out on the old storage costs myth. This sage is still told by uninformed financial advisers and banks certainly don't want your assets go that way: A small size bank vault that can hold a document ledger will be sufficient to store gold with a value of more than 1,000 ounces and costs less than $150/year. Of course, the advertisers of the WSJ will not like this as they cannot lend this gold to real estate and other speculators. I assume, only the costs for a checking account are higher than that. But banks live from pushing paper and charging their clients for it, not preserving value.

To end my criticism on a friendly note I am grateful that Ms. Laise assists in keeping the gold price at artificially low levels, giving me more time to buy more cheaply. And I consider anything below $2,000 cheap, just to keep up with real price raises and not some hedonically distorted official inflation indicators for consumers who neither eat nor commute.

This demonization of gold reminds me of the times when the church told people the sun revolves around the earth.

Comments

[Hugh]

Toni,
Thanks for the clearly written and informative article. Statists can hardly stand the idea that there are people out there who own gold and are therefore immune to their exploits, just as criminals hate thick-walled safes.

[User 142738]

Where did you get the "24 times" figure? $930/oz. today divided by 24 equals $38.75/oz. at some point in the past, but the last gold standard price was at $42.22/oz.

I've seen MySpace postings with less angst.

[Rep07]

There's no error in the S&P return calculation. There's an error in your thinking.

You're forgetting the S&P dividends paid over all those years. They add up. And they compound. That's one of the disadvantages of gold. It doesn't pay any dividends as it sits out back in your bomb shelter with your survival rations, guns, and conspiracy-theory books.

BTW, the gold chart since 2000 bears a striking resemblance to the stock market just before the dotcom bubble burst. An accelerating, unsustainable parabolic rise which always, inevitably leads to a collapse. Followed by years of underperformance.

Sell now, do yourself a favor.

[Misty]

The more negative the media is on gold, the more bullish it is for gold.
I recall an analyst five years ago recommending selling Newmont Gold when it was $19 a share and that is when I bought into the stock.

[eric hart]

The journalists confuse those who are gold bugs with those who take advantage of the current commodity cycle. Are we in a gold bubble? or a gold trend? or a gold cycle? It really matters what your time frame is that you select. Pick a decade: 70's= gold was a great investment, 80's= bad, 90's = bad, 00's=good (so far) . Admittedly this is somewhat simplistic, but I believe less simplistic than the WSJ article. Do yourself a favor and protect yourself against the coming inflation--all but inevitable--and pick your favorite basket of commodities to hedge against this risk to your portfolio. its amazing to me that journalist/anaylsts dont rail against the periods of time that bonds were a poor investment (the 70s) or when stocks were poor-(1968-1982-stocks went sideways, and after inflation, you lost money).

The only thing that matters is what is your portfolio return after inflation. So far this decade, you lost money in most US index funds after dollar depreciation, and after inflation. Gold bubble? No, its cleverly disguised as a rising inflation trend, and currency erosion.
Forget the arguments about why you should or shouldn't buy gold, instead buy a basket of commodities, and wait 5 years. Then check back with your portfolio.

[silveraxis]

I think it is silly to believe one reporter and one paper has any influence whatsoever over the gold market. The Wall Street Journal is about average when it comes to media skepticism toward gold. This is no different from anything else deemed "strange" or "out there" by the popularists. As Prudent Squirrel concludes, we should be thankful that gold prices have run up in a rather orderly fashion, giving us a chance to add to positions.

[Golden Oxen]

Mr Straka, Thank you for your insightful rebuttal of that idiotic article. It was factual, extremely well written, and most appreciated.

[bcr]

The major problem with gold is that, for most people, it does not have any inherent value, other than what Some Other Sucker will exchange for it (hmm, kind of like the USD, bonds, stocks, etc). Gold does not directly satisfy any fundamental human desire: I cannot eat or drink gold. I cannot stay warm with it. I cannot entertain or transport myself with it. I cannot protect my family with it. I cannot use it as a reproductive lure (ok, maybe).

I would prefer a custom basket of oil, wheat, maize, coffee, cocoa, etc as a USD inflation hedge. Except for oil and gold, though, most commodities are basically inaccessible. So a lot of money is chasing gold right now.

[d_teller]

Thank you for a nicely written rebuttal to an idiotic WSJ story. M.ehart's comments also quite a'propos. If one plots the "value" of the S&P vs the "value" of an ounce of Au, since 1973, with some monor bumps, it looks like a ski slope towards a jump point trending downward, faster and faster...regardless of paltry dividends.

[virilio]

the biggest + to physical gold is it can be easily transported on one's person, & liquidated easily in most countries. It's paranoid money.

in the meantime, it is (at the least) holding its value.

[JohnIsOld]

"Maybe the WSJ will cease all mining share reporting once it finds out that gold investors (like active military personnel) would elect Ron Paul for president."

As I told the WSJ last month, their idiotic smearing of Ron Paul has caused me to change my subscription to postal delivery to inflict the most costs on them until my subscription expires, and I won't renew.
Rupert owns Faux News and the WSJ, and he has a larger plan to control us.
Owning gold is one small part of an overall family plan of self-reliance.