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Old reliable stands tall in crisis
atmosphere
The United States has become a nation of
savers. Where once the money management mantra was "invest it and retire
wealthy," it is now "save it or lose it" -- a healthy reaction
to the chaos, greed and notable lack of safety in traditional investments
including those sponsored by Wall Street's financial firms. Retirement plans
and pensions are in trouble. The fear is that individual savings could
disappear overnight in a general financial system meltdown. Overriding all is
a sense that things are going to get worse before they get better and that
the time has come to take matters into one's own hands.
Gold has been a major beneficiary of the
changing money psychology. The World Gold Council reports that bullion
investment demand is running at all time highs.
Gold ETFs -- a bellwether for physical gold demand -- continue to turn in
impressive growth statistics on a global basis. Gold coin demand too, as
reported in this newsletter last month, is running at all-time highs.
Americans are saving, but increasingly they are adding gold to the savings
mix as a hedge against declining returns and overall systemic risks.
Over the past decade as shown by the
table immediately below, the returns on gold have been gratifying. In
compiling the table, I was careful not to skew it in a way to make the
numbers look any better than they need to be to make the point. I did not
over-state the returns by going from the low to the high in any given year,
or even by basing it on average prices -- both of which would have resulted
in much higher returns -- but straightforwardly on calendar year prices. Gold
has posted returns of 19% or better in eight of the last ten years -- a
"yawner" for those who constantly inveigh against gold's supposed
volatility, but "old reliable" for those who bought it intending to
hedge the disastrous turn of events in the global economy. Anyone purchasing
gold at any time during the past decade and holding it for at least three
years has garnered a solid return on his or her holdings.
What's more, the real rate of return as
shown in the final column -- the yield minus inflation -- has been the stuff
of portfolio planners' dreams. Even when you take into account the two
off-years of 2004 and 2008, the average real rate of return over the nine
year period was a stellar 8.5%. If I were to use a single word to define
gold's performance over the past decade, it would be "stalwart."
The other word that comes to mind is "consistent." These two words
are near and dear to the heart of those who wish to hold on to their hard
earned wealth.
 
The real rate of return numbers in the
table were arrived at using the inflation rates generated by Shadow
Government Statistics (SGS). SGS methodology, in my view, provides a more
reliable -- albeit significantly higher -- measure of the inflation rate than
the one used by the U.S. Bureau of Labor Statistics (BLS). As a result, SGS
statistics lend themselves to a more accurate rendition of the real rate of
return. If we would have used BLS numbers, the real rate of return would have
been significantly higher. SGS uses the same statistical format for inflation
the government used in 1980 before the Bureau of Labor Statistics went to
hedonic adjustments. Many economists believe the contemporary version of the
Consumer Price Index understates the inflation rate.
One of the problems often overlooked in
savings plans is the long-term effects of currency erosion. Instead of
looking at the real rate of return on gold in isolation, let's also take into
account the real rate of return on dollar based savings, once again using the
SGS inflation numbers.
As you can see by the right hand column,
returns on bank savings, and by extension most yield-based investments, are
deeply in the red when inflation is taken into account. That said, let me
assure you that the purpose of this special report is not to convince you to
run to the bank and empty your accounts. Rather, it is to emphasize the
importance of diversifying your savings plan to counter the effects of
long-term currency debasement.
Over the ten year period things have
gone from bad to worse. In 2002, the real rate of return was a negative
4.49%. In 2010, rate of decline was 8.43% -- the highest in the last ten
years. 2011 does not look like it is going to end on a much happier note. The
swing between what was lost in dollar-based accounts and what could have been
gained by a simple diversification into gold should also be taken into
account. For 2010, a $10,000 certificate of deposit would have been valued at
$9,157.00 after inflation. That same $10,000 in gold would have been valued
at $11,638 after inflation. That amounts to a nearly $2,500 swing -- a
difference of over 27%!
When one takes into account that
inflation is a clear and present reality and that it truly does affect the
value of the money we have stored at the bank or in a money market account,
it gets the wheels turning. One remedy -- and the one often taken -- is to
seek higher returns in investments associated with higher risk, the Jon
Corzine approach. We all know how that ended for Corzine and MF Global. The
prospect of higher returns always brings with it the risk of potential losses
-- the polar opposite of what we expect from our savings. In the end, the
best approach is the time-worn one -- the one that comes down to us through
the centuries. It is the most direct, the easiest to understand, and for the
past ten years it has been the most reliable. The best remedy is to save gold.
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