Jeff Clark

My Grandmother’s favorite word for politely describing the obtuse among us aptly characterizes a recent attack on gold. And that it comes from an investment magazine that commands front-of-the-rack prominence in waiting rooms across our great land is reassuring evidence we have a long way to go in this gold bull market.

Money magazine’s January/February edition ran an article near the rear of the issue titled, “Coming Down with Gold Fever.” The author paints a decidedly negative picture of gold, going so far as to compare gold’s rise to some of history’s greatest asset bubbles (tulips in the 1630s, Internet stocks in the 1990s). The article is so blatantly biased and inaccurate that I decided to have a little fun with my rebuttal.

I affectionately refer to the gold debunkers as “Bert.” You judge if this author is worthy. What follows are the article’s claims, along with my advice on How to Talk to a Nincompoop (HTTTAN)…

“Gold is now the world’s ‘it’ investment.”

HTTTAN: You’re absolutely right! A few cable TV commercials clearly signal the world has latched on to gold and is dizzy with excitement. The bestsellers at my local bookshop all scream with titles about gold. The radio waves are sparking with talk about buying, storing, testing, and securing all the different options with gold. And all those live newscasts from the lines outside gold shops across the country are really getting old.

►If gold were in a mania, it would resemble the dotcom craze of 2000, where companies with no profits traded at 400 times earnings; when investors were leaving their brokers to chase the latest tech stock; and where everybody and their brother’s dog was talking about the hot technology stock they just doubled their money on. None of that is happening now.

Besides, there’s a good reason investors have been buying gold: it outperformed most other investments last year.

And gold stocks tripled the performance of the Dow, more than doubled that of the S&P, and outran the Nasdaq.

“The price of gold is the only thing rising… gas costs less than it did a year ago.”

HTTTAN: Well, my blood pressure rose when I read your article – does that count? And whew, I’m glad I misread my DirecTV bill announcing higher monthly charges. Higher fees from my bank? Must’ve had my glasses off while checking my last statement. So, are you suggesting we wait till there’s rampant inflation before we buy gold?

►To start, the national average gasoline price rose from $1.70 to $2.70 a gallon over the past year, a 58% increase. The data disproving this blatantly inaccurate and misleading claim is available free on the Internet. If you want to talk about things rising, how about the monetary base that more than doubled over the past 18 months to nearly $2 trillion, the steepest increase ever.

When you think of inflation, you apparently think “higher prices.” News flash: price inflation stems from monetary inflation, and monetary inflation has ballooned. Price inflation is a tidal wave building off the coast. Don’t get caught sipping piña coladas on the beach.

And you’re right: gold is the only thing that’s been rising over the past decade! Ergo, that’s been the place to be with a meaningful portion of one’s investments.

Gold is doing what it’s supposed to do: rise in times of crisis!

“Gold isn’t that inexpensive. And who says it’s guaranteed to return to old highs?”

HTTTAN: Who says?! How about the laws of economics! My teenage son even understands this: the more you print of something, the less each one is worth. And as the dollar continues deteriorating, gold will continue rising. And gee, Wally, they can’t print gold.

►Adjusted for inflation, gold’s peak at $850 in 1980 would equal about $2,300 today, more than double its current price. Guaranteed? Of course not. Where would I find a guaranteed investment? But I’ll put the 5,000-year history of gold ahead of anything that is touted as “guaranteed” in the popular press.

“Even China is wary of gold prices rising too much.”

HTTTAN: Huh? China’s recent comment that they may not buy much gold right now was referring to their desire to get a better price, not a change of heart. In fact, there are so many articles about how the Chinese want gold that it’s hard to catalog them all.

►Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of U.S. debt on concerns the dollar will decline. And this after their holdings were already lower in November than they were last July. Is it possible the Chinese – and the myriad other governments concerned about what U.S. leaders are doing to the dollar – will stop buying gold for protection? Anything is possible, but it’s far more likely that they’re just getting started, considering that just 1.9% of their foreign reserves are held in gold. I think even Money magazine agrees with the merits of diversification.

And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

“Only a small number of sophisticated investors are getting in on the action.”

HTTTAN: You mean like some of the most successful hedge fund managers in the world? Wait – are you suggesting we follow your advice instead? I’ll consider that when you show me that article warning of a market top in ‘08 and urging your readers to get out. Instead, I seem to recall your magazine’s giddiness as the market peaked. Perhaps that explains why many “sophisticated” investors use your magazine as a contrary indicator.

► Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed bought physical gold for personal investment because they fear quantitative easing programs may lead to inflation. In other words, not only are they buying gold in their funds, they’re stashing some at home.

Further, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world’s wealthiest families are also switching to gold. ”Two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, said that super-rich families are now more likely to invest in gold and other commodities.”

“Since 1974, when restrictions on Americans’ owning gold were lifted, stocks have actually done a better job beating inflation than gold has.”

HTTTAN: You’re kidding, right? You actually know someone who has held a stock since 1974? I suppose we could contact Warren Buffett and get a couple names. Otherwise, get real: there’s a time for everything, and right now is clearly the time for precious metals.

► Doug Casey made a fortune investing in gold stocks in the mid-’90s during a mini bull market in gold. Generational wealth was created during the late ‘70s gold run. I have colleagues that have already retired from gains they made in gold stocks this past decade.

“Ask yourself how long this delirium can last.

HTTTAN: Until people like you start telling readers to buy gold, that’s how long. And, delirium? Tsk-tsk, your envy is getting embarrassing.

►There has been little involvement by the general public in the current gold bull market. While there are many examples of this, perhaps the best one is that your magazine doesn’t recommend buying it and really never has. And when you finally do, that will be my signal to start selling. I might as well thank you now.

There’s actually more, but you get the idea. When I finished the article, I couldn’t help but wonder what Bert is really trying to sell us here. He’s clearly either biased, blind, or bought.

Because otherwise, he truly does meet the definition of my Grandma’s favorite word.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

February 3, 2010

Jeff Clark
  • http://www.thetexasring.com Linda Brady Traynham

    A delightful article, as always, darling Jeff, but may I suggest that in times of catastrophe it is every man for himself?

  • Pingback: How to Talk to a Mainstream Nincompoop About Gold Gold just to Me()

  • froggy

    Jeff, I’ve been slowly dipping into gold and gold stocks over the last couple of months. I started when gold was under 1000$. From a South African ZAR perspective there’s been no growth in gold since late last year, it’s all been about dollar weakness. I suspect the average american sees this huge rise in the value of gold. This rise is actually a mirage, it’s a reflection of the American political situation destroying the value of your currency. Average South African sentiment from investors that I’ve spoken to is very negative about gold, especially about gold stocks. Anyone that changed ZAR into gold has seen no growth and ZAR investment in gold stock’s were negative since nov last year. So I’m still waiting for the gold rally that should happen in reaction to the world financial situation.

  • MSG

    Well, the weak longs got flushed out today. Good timing on that article, Jeff. Gold’s down to it’s October highs, Silver back to it’s September 1, 2009 level. While I still believe in higher gold & silver prices in the long run, they won’t happen any time soon, not with this technical blowout. The commercials and strong speculators with large short positions ended up being right – as usual.

  • Happy Gulliver

    I have to agree with Auntie Linda, Thank you for the article.
    Here is the question that I have yet seen anyone answer to my satisfaction. I know what gold and silver do during historical inflation, but how have they done during historical deflationary periods?

    I know the fed is printing faster than a crack head in new jack city, but there is so much bad loan paper out there that all I hear in the economy is a gigantic sucking sound. Thus placing me in the hyper-deflation camp.

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