The gold price (in dollars) is taking a much deserved rest, giving gold haters cause to pat themselves on the back. Many CFAs and CFPs really don’t understand why anyone would trade government paper for shiny yellow metal.
Charles Sizemore, CFA, wrote back in June, “Gold today is as risky as tech stock in 1999 and Miami condos in 2005, and the arguments supporting its rise are every bit as flimsy.”
Sizemore goes on to say that gold is not an investment and that anyone buying gold is only speculating, engaging in the “greater fool” theory.
Gold is an anti-investment for sure, but far from a speculation depending upon a person’s reasons for buying. Those hoping for a quick run up in their GLD shares to generate more paper dollars in the short term are speculating. Those squirreling away a Krugerrand on occasion to hold as hyperinflation insurance are not speculating at all. Just the opposite. Gold is the perfect money because it is, generally marketable, divisible, has a high value per unit weight, fairly stable in value, durable, recognizable, and homogeneous.
The greater fools are those that don’t stash some yellow metal away.
Sizemore goes on to claim that gold is not a store of value. “But if your stated purpose in buying gold is its role as a store of value, even volatility to the upside should be unsettling,” he writes. “You can’t just create ‘value’ out of thin air.”
I couldn’t have said it better myself. That’s the reason to own gold. Mises’s Regression Theorem tells us that people accept paper dollars based upon a time when dollars were backed by gold, the last thread being cut 40 years ago. The dollar has lost 80% of its value just since in the last four decades. Government creates more and more paper and digital money that is worth less and less. Eventually the demand for the government’s money will fall to zero.
Sizemore then claims everyone is on the buy side of the gold trade because its price is posted on the front page of Yahoo Finance and there are all sorts of businesses looking to buy gold.
The DJIA and the S&P are also listed on the front page of Yahoo Finance and Sizemore isn’t predicting a collapse in the stock market. And since when is it the sign of a bubble when entrepreneurs pop up to buy product at 40 cents on the dollar?
Sizemore concludes that the airing of Atlas Shrugged Part I and the Utah Legislature’s passage of a bill making gold legal tender are “two anecdotal signs that tell me the end of the gold boom is nigh.”
“Gold doesn’t have any intrinsic value,” Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. told The New York Times. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”
What especially annoys Mr. Elkin about owning gold is how irrational it is. While gold just sits there, blue-chip stocks represent the production of a going concern.
Driving through Nevada gold mining country, Las Vegas Sun reporter J. Patrick Coolican, writes,
The mine is a thing to behold, a giant pit 2,000 by 2,800 feet, a monument to the genius of human innovation, as well as folly. People like to look at gold, I guess, although there are better things to look at. And they like to hoard it — excuse me — invest in it, when they get scared.
As a friend says, when the aliens come down, they’ll be baffled by the whole gold thing.
Aliens will be baffled by the whole government paper money thing.
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My only question (and, subsequently, my concern) regarding gold is how you determine a price for it. This article concedes that there is some speculation going on, primarily via ETFs, even if there is a legitimate fundamental reason for wanting to own the metal. But, the thing I always ask my gold-bull friends is: If gold went up $1,000 today would you still buy more of it tomorrow? In other words, is there no price at which gold becomes more speculation than investment?
If gold is like any other market instrument, in that it is expectations-based, then can it not be presumed that the current price already imputes some degree of the devaluation of government-issued currency in the future? That is, even if we can say with some certainty that currency devaluation will continue to occur over the next X years, does that necessarily mean that the price (note, not value) of gold will rise in each of those X years?
1. Buying gold for non-commercial purposes is not considered an investment. That’s the point that Rothbard made in his America’s Great Depression.
2. Concerning your “…can it not be presumed that the current price already imputes some degree of”… Read Ludwig von Mises’s The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression to find this quote:
“If the future prospects for a money are considered poor, its value in speculations, which anticipate its future purchasing power, will be lower than the actual demand and supply situation
at the moment would indicate”.
Will the price of gold go up as a result of a decline of the value of paper currency?
Yes it will.
Would you buy gold the day after it appreciated $1000?
My guess is that most of us would abstain from buying gold until we figured out who and why bought so much gold that it spiked $1000. We would probably continue buying gold if it turned out that it was a central bank or a group of central banks who demanded such an enormous quantity of gold that resulted in $1000 price increase.
Most importantly, read Mises’s The Theory of Money and Credit. Especially its second part The Value of Money.
Thanks for the reply, I’ll put those books on my (admittedly, long) reading list.
Regarding the $1,000 scenario… So, we did have a $1,000 run up in prices over the past year or so. And, we are faced with that very question: should we buy today? You suggest the answer lies in investigating the sources of demand that drove prices higher. So, how can you be certain that the entirety of the price increase was due to real demand (e.g. central bank purchases) and not speculative demand (e.g. short-term ETF traders)?
*I’m not challenging your thesis, I just don’t know how to answer this question. Thanks!
There is evidence that central banks around the world are buying up gold. According to this article Korea increased their gold holdings by 17 fold, while Thailands’ gold reseves have gone up by 15%.
http://tinyurl.com/3lu2kqv
I think it says something when a nation that has 64% of their currency reseves in US Dollars decides to increase their gold holdings by a factor of 17.
And if that is not enough, a wall street journal article just came out annoucning that world centrals banks demand for gold has gradupled in the 2nd economic quarter.
http://tinyurl.com/3cmqbur
If Mr. Elkin read Hans-Hermann Hoppe’s “The Yield from Money Held” and understood it, he would know that gold does indeed “represent the production of a going concern”. Production of security, that is.
In this panic perhaps the most considerable concern of all.
Speaking as a CFP, I can say that I’m one of those who thinks gold is a wonderful store of value. Perhaps today’s price does reflect a buying bubble. Then again, why would there be a bubble? Perhaps it’s the unrestrained devaluation of the dollar.
As long as a fiat money system exists, gold will always be a perfect hedge. Unlike a piece of paper it ultimately holds real value.
The status quo has a vested interest in the stock and bond markets, as well as the dollar as a reserve currency. The status quo makes money off of the manipulation of these markets. If you repeal legal tender laws, how can they make profits from something that is physical and finite in nature when they have been in business playing with the ethereal vapor of digital numbers and valuations?!
Plus, the big names in the financial industry have been the darling of governments world-wide. They receive preferential treatment, are too big to fail, get their risks and losses socialized, while keeping the profits. Why is it shocking that they wish to attack Gold or other legal tender competition when it directly threatens how they have done business in their lifetime?
“You can’t just create ‘value’ out of thin air.”
This is why fiat money is worthless.
“Gold doesn’t have any intrinsic value,”
… whereas you can at least use paper money as toilet paper.
People in Zimbabwe are still spending all day panning for gold – they can exchange gold nuggets for food.
Any pawn shop will still give you cash for gold.
Why do you think people are stealing copper?
If gold has no value why did FDR steal it?
Based on the performance of the last 10 years,If Mr.Sizemore could be contacted and if I could ask him if he could keep $100,000.00 worth of gold coins in one lock box and $100,000.00 worth of fiat paper money or bonds in another lock box and open the lock boxes 10 years into the future, which lock box do you think he would say would be worth more in purchasing power? If he said paper,he would be lying.
The recent price drops in gold (and rebounds) have been due (I think) to exchanges (CME) raising margin requirements in an attempt to cool it off.
Gold haters have been saying this for years. They said it when an ounce of gold was $500, $600, $800, $1000…. what they don’t ask is why is the dollar price of gold going up? They are either stupid, dishonest, or in denial. I’m betting on a combination of dishonest and denial. Gold has a long, long way to fall before its run is over. Most of the smart savers will have taken the money and run before gold is worth far less in dollars, that’s if the fed note doesn’t collapse first.
There is a story on NPR today about the BitCoin. The writers were amused that 1 BitCoin was $17 USD, based on the exchange rate when researching the story. What they didn’t ask was why does it take so many dollars to get just one BitCoin? When the fed note isn’t even worth close to something like one BitCoin why wouldn’t people go to gold and silver as a savings instrument?
It isn’t the value of gold that’s changing. It’s the value of the dollar that’s changing. The confusing point to so many CFAs and CFPs (I am a CFA charterholder, by the way) is that gold prices are quoted in dollars.
What would be interesting would be to look at gold prices over time in other currencies as well as in other commodities. I would imagine an ounce of gold today would buy as much oil today at $80/barrel (say, around 22 barrels) as it would have in 2000.
C.J.,
I’d have to say that the value of Gold is also changing due to the current instabilities in financial markets world-wide. Sure the value of the dollar is also changing, but I see two things going on.
Demand is increasing the price of gold, as well as the value of the dollar decreasing.
I agree, although the effect is amplified when gold’s “value” is measured in dollar terms.
I’d still like to see some data on the purchasing power of gold over time.
C.J.
Here is an article from Kitco to get you started on your thoughts about the purchasing power of precious metals over time. Hope this helps.
http://www.kitco.com/ind/Nathan/jun092011.html
There’s a chart here: http://www.the-privateer.com/chart/g-multi.html
take something like the price of McDonald’s hamburgers or White Castles – which haven’t changed physically a whole lot since the 40s, and then price them in Gold over time…
This is a good idea. I predict you would find a quite stable relationship but showing th ehamburgers getting progressively cheaper in gold terms with every passing decade. Then do it with , say, th ecost of public schooling or regulated electricity, and I bet youll see those things getting more and more expensive in gold terms with each passing decade….. and presto, you will have demonstrated the relative merits of free markets vs regulated ones, without all that complicated adjusting for monetary inflation.
He’s right that gold is this era’s wampum, but I don’t think he understands why. Wampum was not such a bad currency. It had a certain intrinsic value as a decoration and as an aide memoire to record treaties and such. It could not be counterfeited but could only be produced by diligent labor. The length of the wampum was proportional to its value. It could be subdivided and it was light and portable. In eastern North America at that time gold, silver and copper were very rare and iron (after the arrival of Europeans) was very abundant, cheap, heavy and hard to subdivide. Wampum beads were therefore a very good medium of exchange and store of value.
If one is ignorant of the qualities of gold then it is not surprising that one is also ignorant of wampum.
In principle, I agree with the pundits who insist gold is not an investment. It produces nothing, you can look at it shining at you , but thats about it.
But where they miss the point is when they swiftly cry that the price is unsustainable, its a bubble , etc etc, . So what? Its not an investment! its current price has nothing to do with any increase in the value of gold – its a reflection of a decline in the value of the dollar. Gold might no longer have legal tender status in the administrative matter of effecting transactions and settling debts, but it is still as ‘money’ as it has ever been in the eyes of those who wish to hold it, for retains the old familiar ‘store of value’ m oney function that is still taught to undergraduates as one of the functions of money, but which function has long since evaporated in the case of legal tender currencies.
So yes, gold is a lousy investment. But every balanced portfolio needs some cash. And as cash, gold is superior to reserve notes. That is the central point.
Mr French said: ‘Aliens will be baffled by the whole government paper money thing’.
yes, but truth be told, if gold was still money , they would be equally baffled by that. And From an outsider’s perspective, they would have a point. what IS th epoint of going to extraordinary lenfths to dig up and refine a useful element ( malleable, ductile, alloyable, very good conductor………) and then proceed to NOT use it, but to stockpile it, go to the trouble of securing it, and tho move some of it around from hand to hand endlessly, without ever actually using it in a productive way? From the perspective of an outsider who sees humans as homogeneous , anonymous ciphers, mere particles in a mass, this simply would not make sense. ‘Why dont they chuck that cumbersome stuff away and just make simple accounting arrangmeents? Save themselves an awful lot of wasted effort…’ he would say ….
Hang on, I just thought of something: Keynes must have been a martian. He too couldnt concieve of th emass of humanity as being individuals, each with unique value judgments meaningful only to themselves…….
Witnessing fools trading things of value like Rolls Royce cars and gold (highly valued throughout the universe for its many uses but especially its usefulness as the best of all monies), the aliens will probably have brought along some of their own fiat money to see if they can swap it for real money to take back with them. They should be able to make the swap with CFAs and CFPs by telling them their fiats are legal tender not only on their home planet of Nonex but throughout the known Universe. Thus they may depart our planet with a spacecraft loaded to maximum lift-off capacity with the fool’s gold (pun intended).
Gold’s increasing price in terms of dollars reflects the metal–the universal, historical, people’s-choice money–reasserting its role as the number one money after decades of usurpation and suppression by States and their central banks. Fearing the day when the dollar falls to its intrinsic value as paper, people are exchanging their potentially worthless dollars into essentially valuable gold as quickly as they can whenever they acquire more than an insignificant sum of Federal Reserve Notes (a.k.a., “ferns”) not intended for spending or investment. When and if they ever need more ferns than they have at hand, perhaps because Walmart does not yet transact in gold, they sell as little gold as possible to conduct their dollar business. Instead of holding their walking-about cash in ferns, checking, or savings accounts, folks are keeping their ready cash in the form of gold.
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