“I like gold as much as you but unfortunately, most of the time it can't be trusted as an investment”.This poses the question of why he likes gold? Does he like the colour of it. Otherwise he just looks like an anti-intellectual idiot. After all, doesn’t gold become good buying at some point? It is volatile, so would you not at least consider gold to be good at a point? If there was to be a point; would it not be after a 50% correction? Not even when gold miners are struggling to make a profit?
“I'm not talking about gold mining shares, though you may as well throw them in as well. Over the past year the gold share index has slumped about 60 per cent, when other stocks have risen an average 20%”.Yes, but you are talking about a fall of 60% off a high; not off their long-term low. Neither should anyone consider any investment a ‘buy and hold’ proposition; least of all when you have governments distorting the economy. If you were to hold any investment in a debasing currency market, it would be gold, if only because of the ‘boom-bust’ cycle, but there are other choices if you ‘trade’ the market.
“The problems for the miners have been poor management, big capital outlays, rising costs and competition from bullion-holding, exchange-traded funds”.Really, poor management is a reason to dump gold metal, gold indices and all mining stocks? Not reason enough to look at the quality of management, or even diversify? The fact that miners need capital is actually one of the reasons they are ‘oversold’ and become compelling takeover targets. Yes, costs for miners have risen, and as a result, gold miners are now struggling to make money. This is reason to buy or hold them, not to sell or ignore them. If gold remains at these levels, gold mines will close, or not open. Why would ‘bullion holdings’ or investing be a problem; that is a source of demand underpinning the entire ‘gold-related’ market?
“Gold had a sensational bull run for 12 years during which it jumped sevenfold. That was then. As we speak, the US dollar price has dropped by one-third from its peak 18 months ago. In Australian dollars it's down by about 20 per cent”.That is not surprising really. Commodities are volatile, and that is good, because volatility is a source of rapid earnings.
“What's more, in real terms it peaked a good 30 years ago… After allowing for inflation, gold should be $US2300 an ounce to hold on to its previous peak in 1980”.Again, that’s reason to buy, not to ignore the fact that its under-valued.
“But the ultimate test was the debt ceiling crisis, when the US could have defaulted on its bond payments. It flunked. When the very paper base of the financial system - US government bonds - couldn't be trusted, bullion should have been beside itself with excitement. But no. It dropped. And just to rub it in, that was in both the US dollar-denominated price as well as in Australian dollars”.This is silly logic because the ‘damage’ to financial markets has already been done. The ‘damage’ is not the uncertainty of financing the US deficit. The uncertainty’ would be the spectre of governments struggling to sell bonds to the Chinese or taxpayers withholding their sanction of the tax system. i.e. The prospect of Chinese ‘opposition’ to the US government, which is not likely because they share the same system; or the spectre of the US military or police losing control to a libertarian army. Otherwise the only factor likely to push up gold is:
1. Expectation of falling asset prices
2. Actual rise in ‘cost of living’ inflation
“Perversely, it's risen since a default was averted by suspending the debt ceiling until February 7. Well, April really, because that's when Treasury's ''extraordinary measures'', by which it means raiding public service retirement reserves, will run out. Perhaps gold is girding its loins for a second chance”.Actually, these considerations have no bearing on gold. Gold rose because its at a technical support level.
“It's also had a falling US dollar in which it's denominated going for it that should have made it more valuable, but to no avail”.It would only make it more valuable in US terms; not in absolute terms, which bares no consideration for the US fluctuations.
“The problem for gold is the market never took the default threat seriously, either because it foresaw the compromise being struck at the eleventh hour, or the Federal Reserve would step up, rather than taper down, as the market dreads, its bond purchases”.Neither proposition is actually bad for gold. Greater money illusion will just see gold rise; and an undermining of the monetary system with a collapse in asset prices will also be good for gold, i.e. If people lose confidence in government.
“Even the growing support among financial advisers for holding a small part - say 5 per cent - of your wealth in gold isn't because they think it'll be a ball tearer. It's because it goes its own way willy nilly, so there's something to fall back on in a sharemarket correction. The very fact that it's erratic is its virtue”.The author seems to miss the fact that ‘asset prices’ are very high, and some are even describing them as ‘in a bubble’. The question then becomes –is gold relatively cheap, and his argument is apparently yes, but there is no reason to keep it.
“The challenge for gold is that there's no inflation, despite the unprecedented money-printing in the US and more recently Japan”.Actually, there is plenty of ‘inflation’, it’s just not the type of inflation that this guy looks for. Being an ‘empiricist’ he solely looks for ‘physical signs’ or evidence. In the process he lacks any intellectual understanding of gold or indeed inflation. Asset price inflation is the order of the day. So what happens when asset prices fall? Well, people sell. What happens to debt levels when there is a corresponding fall in the money supply? Well money has to be printed, or other things have to rise in price to compensate. In the short term, such corrections can actually see gold prices fall in the short term. But eventually it is gold that recovers because it is cheap. We might ask – if gold is so bad – why did I ever rise to $1900/oz?
“On the contrary, both countries are trying to avoid deflation - falling prices and incomes. And when inflation does rise, so will interest rates, which will be more help than non-income-earning gold”.No, both countries are trying to prevent ‘asset deflation’ because this will cause banks to foreclose on non-performing assets when people lose their jobs. Governments need to buoy asset prices in order to keep ‘cost-of-living’ inflation low.
“You can even buy CPI-linked bonds guaranteeing no loss of capital in real terms which also pay an income, albeit modest, along the way”.Yes, you can, and if you believe governments will be around to pay them, or that gold is not going to rise, then that might be a short term place to put money…but then, governments are debasing money, as he has already alluded to, so why would you believe the contemporary measure of inflation?
The previous critic of gold with the SMH was Michael Pascoe. I critiqued his appraisal several years ago. Let's she how he faired with his analysis. Did he make any money? Was he right about gold? Well, let's look at the 10-year gold price chart:
1. June 2011 - Michael Pascoe talks down gold - then gold ends up rallying from $1400 to $1900/oz...almost immediately.
2. Couldn't find another article to be fair....but I know I've archived several.
Of course, this leaves me wondering why journalists hate gold? Well, perhaps they really love it, i.e. Maybe they are genuinely hypocrites who love to give gold to their wives. Maybe they just hate it because they are told to hate it. i.e. Maybe on some level media CEO's like people to be 'psychologically' tragic enough to care about the news, but not economically tragic to stop investing, or buying newspapers. Its probably a fine line. You will struggle to find a newspaper that talks down an economy...so that's pretty well the answer. Its just an old-fashion conflict of interest. Personal integrity precludes me from being so disposed. That's not to say I don't have a conflict of interests, because I have plenty. It just doesn't change my judgement. i.e. The conflict does not shape my choices. It might delay them. i.e. I might withhold a judgement say in GRY because I want to sell. But I'd not tell people it was good short term if I was selling short term. And I'd not do both at the same time. i.e. I'd not say buy when I'm selling, unless I was motivated by non-appraisal reasons, i.e. Like I needed the money for something, or had a better buy in time. Its all about personal integrity.
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