Ben Bernanke told Congress he doesn’t understand it.
Warren Buffett doesn’t care for it at all because it doesn’t do anything. It just kind of sits there.
He even went on to say, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
And in an older post I stumbled on from The Atlantic, one of its writers even called it a horrible investment.
The problem is obvious. They just don’t get the idea of gold.
That’s fine, as long as they don’t weigh in on it with the wrong set of rules.
Imagine you thought The Economist was chock-full of creative literature. It wouldn’t make any sense. In fact, it’d be laughably pathetic and absurd.
Ben Bernanke is an economist who has been solely focused on macroeconomics and government policy as a professor, government worker, and at the Fed.
Warren Buffett is arguably the best and most influential investor of his time, focusing on value investing in equities.
And the business section over at The Atlantic is in the business of chasing after subscribers and web page views with the hyperactive, endless news cycle.
A Classic Mistake
Anyone watching gold news knows there are two big crowds: one that will publish for it, and one that will publish against it. In spite of how little its role has changed, it is somehow still polarizing and controversial.
I try to avoid responding to it… I’m just not that good at resisting. Here is what baited me in this time:
The premise of the article that accompanied this chart was that gold was a horrible investment from 1500 to 1965.
The chart (which was originally from ZeroHedge) is completely divorced from reality, and the article is drawing comparisons between two wildly different times.
First off, we’re not in the organic society ruled by kings and queens with divine right and insulated from other nations. Business and commodities, including gold, are now international.
If I had the time or inclination, I’m sure I could find a chart showing somewhere in the world where gold soared over the same arbitrary time range. Unfortunately, ZeroHedge hasn’t posted one using research from somewhere else for me to rip off and use out of context.
Second, you cannot use 2010 pounds in the 1500s. Do I even need to say this?
One pound at the beginning of the chart in 1265 is equivalent to over 800 GBP today. Gold lost 80% of its value over the cherry-picked time period used in the article.
If we extend the time period to today, it’d only be around a 20% loss. Take your pick — you can retain 80% of your wealth over 500 years or .14% (as the pound did).
Use the same cherry-picked time range as the article, and it’s 20% versus 2%. Gold still easily wins.
Here is the kind of chart that tells the real story instead of disingenuously supporting a half-assed smear job. It shows gold prices in fixed November 2013 U.S. dollars, along with how the dollar has changed over time.
The Equity Argument
Arguing that equity or stocks are the obvious alternative to sitting on gold or pounds sterling is the knee-jerk reaction, but it doesn’t work either.
First, it assumes that the person finds the risk acceptable and that times haven’t changed.
Good luck finding a stockbroker eight years after Christopher Columbus made it to the New World. If you were rich, it was because royalty let you get rich. We’ll have to use more modern and infinitely more relevant examples.
But as long we’re allowed to cherry-pick, if you invested in General Motors on April 28, 2000, within a decade you would have lost everything.
Investing in the entire S&P 500 index on October 12, 2007 would leave you with a mere 64% of your wealth within a year and a half.
Are these two examples a fair representation of all stocks? Certainly not. Neither is judging gold based off of conversions to GBP in the period ranging 500 years ago to 50 years ago.
However, these examples actually did happen, unlike the hypothetical gold investor who is over 450 years old.
GM workers who steadily bought company stock using retirement funds were laid off holding worthless shares.
The S&P 500 soared to new highs after March 2009, but plenty of people couldn’t wait for the market to rebound. They had to use the money they had left because they were retired.
Reality rarely lines up with cherry-picked date ranges that are designed to maximize hypothetical returns or show how terrible an investment can be. These people would have been far better off holding gold.
The Gold Story the West Ignores
The article went on to parrot Paul Krugman by saying the only time investing in gold is worthwhile is when real interest rates are negative. Then it went on to predict a long-term bear market.
This flies in the face of what is really going on with gold around the globe. Two historic transfers of wealth are underway.
First, we have the flow of gold from the West to the East. China just overtook India as the largest consumer of gold at 25% of global demand.
Chinese gold output and consumption rose to record levels last year. Both the government and citizens are aggressively buying whenever gold prices fall.
Chinese consumers bought 1,176 metric tons of gold in 2013, marking a 41% rise from 2012. Jewelry consumption rose 43%. Gold bar consumption rose 57%.
The Chinese government, with the deepest pockets in the world, hasn’t raised its official gold reserves since 2009, but WikiLeaks uncovered the truth.
In a U.S. Embassy cable from Beijing on April 28, 2009, it was stated that, according to China’s National Foreign Exchanges Administration, China is trying to kill two birds with one golden stone:
“…The U.S. and Europe have always suppressed the rising price of gold… suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”
As for India, it had to put severe restrictions on gold imports to curb wealth from fleeing beyond the government’s reach and control. It is stripping wealth from its citizens and doesn’t want to allow any alternative.
Stripping Us Bare
The second historic transfer of wealth is much closer to home.
We live in a time when central banks collude to devalue money and remove any incentive to put money anywhere except in equities.
We see a wealthy elite manipulate, lie, and cheat its way to unprecedented riches without fear of prosecution — let alone lost profits.
Wages and the middle class whither, rampant unemployment and government dependence become entrenched, and politicians preside over it all.
Major currencies have shed virtually all of their value within the last hundred years. Real inflation has been hidden in official figures after the government altered how it is calculated more than 20 times in the last several decades.
Ultimately, currencies inevitably collapse. The wealthy elite and politicians have a chance to skip town. Everyone else is left picking over the burnt out ruins of their lives. It is only a matter of time.
Alan Greenspan, for all his flaws, was right when he stated, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Gold may not be perfect, but it is the best way to opt out. It is what humanity has agreed upon as intrinsically valuable for 5,000 years.
In a world where we’re facing financial conspiracies designed to ruin us, physical gold is one of the few options no one can subvert and corrupt. I don’t understand why that is so hard to accept.
