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"What's past is prologue." – William
Shakespeare, The Tempest
These
charts summarize gold's impressive performance during the tumultuous first
fourteen years of the 21st century. Investors fearing some future Black
Monday, a general bank or currency collapse, a 1930s-style economic
depression, or a sudden and virulent inflation took precautions by purchasing
gold coins and bullion as a form of portfolio insurance. Gold Chartography
101 is a record of that past. At the same time, though, it could very well be
a glimpse of the future.
The same
uncertainties that drove gold demand throughout the past decade in a half are
still with us today. In fact some analysts believe that current global
monetary policy is setting us up for another economic crisis far worse than
the near full meltdown in 2007-2008. "Focusing all policy efforts on
boosting inflation rather than on structural reforms to boost growth,"
says Paul Singer, the outspoken and highly respected hedge fund manager,
"will potentially be seen in retrospect as one of the most inexplicably
ridiculous mass delusions in the history of economic and monetary policy in
the developed world." Mass delusion, it should be added, quite often
precedes the black swan event.
These
specially customized charts are drawn with the first-time gold investor in
mind. Though the river of gold market analysis runs wide and deep on the
Internet, precious little of that content is devoted directly to the most
basic rationale for gold ownership. Here we fill that void in chart
form – a quick reference for the first-time investor.
Chart 1 presents a quick overview of gold's annual rate of
return from 2001 through 2014. An investment of $100,000 made in 2001 would
have a market value today just under $440,000 even with the market correction
of the past two years taken into account. The average annual return over the
period was just over 12%. By comparison, stocks over the same period (at the
18,000 level for the Dow Jones Industrial Average), averaged a return of just
under 4% annually. Also keep in mind that over the period stocks enjoyed two
bull markets and gold only one! A 12% annualized return in a no yield
environment represents a phenomenal return.
 
Chart 2 is a magnification of Chart 1. It shows gold's
annual gain over the same month in the previous year. Its most telling
features are the spikes running concurrent to times of economic and financial
stress. One lesson to be drawn from this chart is that the best time to buy
gold is when everything is quiet, and the market is declining or running
sideways. The largest year over year gains – in some cases 60% to 70% – were
realized when gold was purchased on the downslopes. These spikes were
accompanied by heavy physical gold demand both in the United States and
abroad with national mints and refiners running 24-hour schedules to keep up
with coin and bullion demand.
Chart
3 offers the kind of fundamental analysis that drives the thinking of
professional investors and portfolio managers. A real rate of return – the
gain on yields after inflation – over an extended period of time is essential
to maintaining and building wealth. As you can see in this chart, there has
not been a real rate of return on dollar savings and highly-rated yield
instruments since the 2007-2008 financial crisis, and prior to that true
yield was scant. (The blue areas reflect the negative real rate of return.)
As a result, investors have been forced to raise their risk profiles – an
unhealthy circumstance that also raises the prospect for significant
speculative losses and argues persuasively in favor of gold diversification.
Chart 4 shows the impressive real rate of return on gold
ownership since 2000. Nothing argues for a gold diversification under the
current economic circumstances as forcefully as this single chart. It
requires no embellishment. The gold areas above the red CPI bars reflect the
real rate of return. (Please
see the commentary under Chart 1.)
Chart 5 demonstrates gold's viability as a deflation
hedge. During the Great Depression of the 1930s, the price of gold was fixed
at $20.67 per ounce, and from 1933 at $35 per ounce. When the general price
level fell, it gained in purchasing power simply because of the fixed
benchmarks. A second advantage to gold ownership under deflationary
circumstances is the metal's status as a stand alone asset that is not
simultaneously someone else's liability. Because it is an asset the investor
holds outside the financial system, it does not carry the attendant
counterparty risk associated with bank deposits, annuities, common stocks,
bonds and other financial assets. As such, it might very well be the ideal
hedge and safe haven under deflationary circumstances.
Chart 6 isolates a recently attained benefit to gold
ownership not widely known or publicized – its capacity to effectively hedge
against disinflation. As the past disinflationary decade of asset bubbles,
financial institution failures and global systemic and sovereign debt risk
unfolded, gold proved capable of consistently delivering the goods under
disinflationary circumstances. During the 2000s – an era of indisputably
disinflationary circumstances – gold rose from just under $300 per ounce in
the early 2000s to just over $1900 per ounce by 2011, a gain of over 600%.
Since then, gold has taken a breather. As this page is posted in early 2015,
it is trading in the $1300 per ounce range -- still up over 400% thus far in
the new "disinflationary" century.
Chart 7 depicts gold's utility in the other malady that
situates itself between inflation and deflation – stagflation. President
Ronald Reagan famously added the unemployment and inflation rates together
and called its sum the Misery Index. As the Misery Index moved higher
throughout the decade so did the price of gold. At a glance, the chart
establishes gold as an effective stagflation hedge to go along with its
inflation, deflation and disinflation credentials. The Misery Index more than
tripled in that ten-year period but gold, as the chart shows, rose by nearly
16 times.
Chart 8 demonstrates the value of gold ownership during a
hyperinflationary crisis. The numbers you see in the left axis are not a misprint.
At the height of Germany's Weimar Republic hyperinflation, gold traded at
118.23 billion
marks per ounce. In 1918, it traded at 87 marks per ounce. Wholesale prices
went from 2.34 to 725.7 billion index points in the course of five years. At
the height of the inflation, prices were doubling every two days – a nearly
immeasurable inflation rate. An individual's life savings could not purchase
a newspaper. As you can see by the chart, those who converted their marks
into gold early in the process were able to hold on to their savings. Those
who did not were left to the destructive forces unleashed by the
hyperinflation.
Chart 9 illustrates the relationship between growth in the
monetary base (otherwise known as quantitative easing) and the gold price.
Quantitative easing, as you probably already know, is the polite term for
printing money, the process that ultimately and without warning unleashed the
nightmare German hyperinflation described in the previous chart. The
interesting feature in Chart 9 is the sudden and inexplicable divergence
between the two data sets starting in 2013. This divergence, in our opinion,
presents an attractive buying opportunity for the long time accumulator of
gold, whether or not the money printing creates runaway inflation. Though
some might see this chart as depicting a direct correlation between gold and
quantitative easing, we see the two as reacting to the same stimulus, i.e., a
bad economy. Central banks react by printing money. Investors react by buying
gold. Though the Federal Reserve has curtailed its quantitative easing
program for now, there is no indication it is off the table permanently.
Chart 10 might be the most important of our grouping in
that it helps the first-time gold investor understand what sort of an economy
will govern investment portfolio choices for the foreseeable future. When the
United States abandoned the gold standard in 1971 and freed currencies to
float against one another, the era of central bank monetary experimentation
began. We are still in that era. Predicting the course of the economy and the
financial markets with any degree of reliability in a fiat money environment
is problematic, if not impossible. It is this permanent aura of economic
insecurity that has pushed gold demand since the 1970s and driven it to
record heights since 2008. Former Fed chairman Alan Greenspan, who
understands the nature of monetary experimentation better than most, recently
said, "Gold
is a good place to put money these days
given its value as a currency outside of the policies conducted by
governments." Until the monetary system is once again put on
a stable footing, gold ownership will continue to be at the forefront of
thinking for private and public investors alike – and on a global basis.
Michael
J. Kosares is the founder of USAGOLD and the author of "The
ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty
years experience in the physical gold business. He is also the editor of Review & Outlook, the
firm's newsletter which is offered free of charge and specializes in
issues and opinion of importance to owners of gold coins and bullion. If you
would like to register for an e-mail alert when the next issue is published, please visit this link.
USAGOLD Review & Outlook is the
contemporary, web-based version of our client letter, which traces its
beginnings to the early 1990s under the News & Views banner. Its principle
objectives have always been to keep our clients informed of important
developments in the gold market; condense the available gold-based news and
opinion into a brief, readable digest; and counter the traditional anti-gold
bias in the mainstream media. That formula has won it a five-figure
subscription base (and growing). In addition to our regular newsletters, we
occasionally publish in-depth special reports that focus on events and
developments of interest to gold owners.
Valued for its insight, accuracy and reliability, this
pubilcation is linked and reprinted regularly by a large number of websites
both in the United States and around the globe. It also enjoys the goodwill
of countless websites, individuals and organizations who contribute regularly
to its content. To this group, we owe a deep debt of gratitude.
Disclaimer - Opinions
expressed on the USAGOLD.com website do not constitute an offer to buy or
sell, or the solicitation of an offer to buy or sell any precious metals
product, nor should they be viewed in any way as investment advice or advice
to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical
precious metals for asset preservation purposes, not speculation. Utilization
of these opinions for speculative purposes is neither suggested nor advised.
Commentary is strictly for educational purposes, and as such USAGOLD does not
warrant or guarantee the the accuracy, timeliness or completeness of the
information found here.
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