Gold Again

I follow Nouriel Roubini on Twitter @nouriel because he has interesting views on many market subjects. Yesterday he retweeted a story that ran in Bloomberg News – Losing Faith in Gold From Ghana to Vancouver Proves Rout.

If you are thinking about gold as a defensive investment, it is worth a read. If you are thinking about it as a way to vast riches, it is a must read. The gist is that gold prices are probably not going up and there is considerable evidence to that affect.

The article printed out at 8 pages so I expect most will not read it. Here’s the gist.

  • The sevenfold run up in the 12 years to the end of 2011 has probably ended.
  • Many producers have discontinued because their cost to produce is higher than the market value.
  • Barrick Gold and others have taken $23 billion in writedowns because they do not see price recovery
  • The American economy seems to be recovering, albeit slowly.
  • Europe seems to be turning the corner.
  • Central banks have fared badly with their recent purchases.
  • Most hedge funds are getting out.
  • Gold costs to own
  • Some people have already lost a lot and are no longer committed to the metal

All interesting but not conclusive. There are some who are investing it its recovery. Dubai for example.

Where to go from here?

One convincing argument in favor is that during the bull market, from 1999 to 2011, gold rose 600%. True, but you need to pick the ends of period carefully to make the case. If instead I pick 1980 with gold at $850 I find that it took 28 years for me to breakeven. Today in constant purchasing power, I have lost half my money. Not a terrific inflation hedge.

There is too much hype. After it was released on July 3, how many ads did you see on television for the movie “the Lone Ranger.” Many! Why? Because the movie was a flop and they were trying to recover some money. As long as the recovery is greater than the ad cost it makes sense from a business outlook. The rule: Any movie heavily promoted after its release is a dud. No sane person would spend money on advertising unless they had to do so. If people were telling their friends how good it was, no need to advertise.

The same rule applies to other things. Like gold. Why do actors promote it every hour of every day? Because they get paid to do so and because enough people buy the product to make it worth the promoter’s trouble to pay actors and buy TV time.

Most of the comment is emotional as opposed to factual. (you are at risk, there have been huge profits made by others, you are missing something good) It is impossible to argue, based on facts, with someone consumed by bubble thinking, faith, or conspiracy theories. Any evidence is absorbed and made to confirm the preferred theory.

Here is a question that is hard to fit in to any theory. “If it is such a good idea to hold gold, why does anyone sell it to you?”

Answer: because they are commodity traders and they make their money by buying and selling both. You are expected to be a buyer only.

If only a few of the buyer-only types change their mind there will be further erosion in the price as the promoters look for new buyers to buy their first holding and new buyers to replace the old ones who are selling. Hard problem and it usually precedes a crash.

More food for thought on the subject Forbes 15 August 2013

The end of it all is gold is a commodity and it reflects the “value” of American currency. Based on the price-adjusted value of $US since gold was allowed to float in 1972, it should be selling at around $400. Even if the American dollar is overpriced by 100%, and it may be, gold should be around $800. See an old MoneyFYI blog piece. What should gold sell for?

I don’t know where gold is going in the short term, but in the long term it will reflect the functional value of the US dollar. If you think that gold will be $5,000 an ounce then you need to also believe that the $US will be worth about 1/12th of what is worth now. Gas at $50 per gallon. New York apartment rents at $40,000 a month. Minimum wage at $90.00.

It is a bit unlikely that that happens and afterwards, there is a viable economy anywhere on earth. To make money on that price you also have to believe that governments will not confiscate your gold. These are the same governments that you don’t trust now and use that as a reason to buy gold.

I hear people saying essentially this.

I believe the US economy will evaporate. I believe governments will let me make money while it happens. I believe in magic.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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