SPECIAL REPORT
December, 2011
by Michael J. Kosares
Saving Gold
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. 
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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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