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Last Thursday I was invited on
CNBC’s Fast Money to discuss gold with the assembled panel. Far
from pugnacious, the group was surprisingly objective in their line of
questioning and desmonstrated a genuine interest in
the prospects for gold – wihtout putting
forth a position of their own. Which is as it should be.
If you don’t know anything about a certain business or asset class, you
ask questions, you don’t make it up as you go along.
Francesco Guerrera, however, writing in the
Wall Street Journal yesterday, has no such manadate.
He’s happy to misinterpret the causes of gold’s rise and fall, as
well as its value, in a piece entitled variously “How Much is Gold
Really Worth?” or “A Golden Age for Gold Loses Some of its
Luster”. Geurrera’s negativity on gold,
and his timing, could probably not be worse. Despite a recent correction that
gold drop 15% from a recent all time high of $1920,
the relentless upward march that has characterized the price of gold since
2002 has resumed. Furthermore, and as Guerrera
fails to point out, each time gold has corrected by 10% to the downside
within a two week window after setting a new record high, it has gone on to
increase exponentially in price to set another record high.
But Geurrera is more focused on the negative
soundbits that smack of a propoganda
campaign initiated by Tokyo Rose.
Her writes:
“Look at it this way: If the gyrations of commodities markets
were to be turned into a movie, gold would be the sad sack with unexpected
powers of redemption, played by Paul Giamatti.
Inert and largely useless, in boom periods gold sits around in its
drab living room moping, ignored by investors and outshone by racier assets
such as stocks and mortgage-backed securities.
But as economic gloom spreads and recession fears grip the world,
gold, helped by its more-volatile buddy silver (Owen Wilson), stages a
triumphal comeback, riding to the rescue of scared fund managers.
I have a title for this tale of an unlikely hero for our troubled
times: “No Yield”—the feature that sets gold apart from
most other assets.”, he writes.
Gold is neither inert, nor useless, strictly speaking, from an
industrial point of view. It is one of the bery
best conductors of electricity (Look to brands like the high-end Monster
gold-tipped stereo cables as evidence), and its maleability
make it one of the most ubiquitous ingredients in computers and electronics.
As far as his allegation that it is only attractive when
‘economic gloom spreads and recession gears grip the world’, thats just a bald faced lie.
Gold’s 500% rise since 2002 has occurred precisely in the middle of the
bull market that marked 2002 – 2008.
And finally, if he wants to classify gold as a “no-yield”
asset class, I’ll wager he’s virtually penniless and makes
nothing investing. Had you bought gold in 2002 and sold even at the very
bottom of the last fortnight’s correction, you’d still be up 480%
or more. While that certainly isn’t ‘yield’ in the
classical Treasury or dividend stock sense of the word, that profit could
certainly be calssified as yield. And incremental
payment from an asset whose cost base is deteriorating is irrelevant next to
the bottom line: retained earnings over time.
So what motivates such mis-information, and
more importantly, how is it that a publication as respected as the Wall
Street Journal could publish information whose value to the investing public
is severely negative? The answers to that are mysteriously absent, and email
to the editors went unanswered.
But readers need to bear only several things in mind when
contemplating gold as an wealth preservation
strategy.
Since 2002, the price of gold has risen in direct proportion to the
global supply of fiat currency, particularly USD. Gold has risen by a factor
of 5 in that timeframe, and so has the quantitiy of
USD. And certainly, there is nothing – absolutely nothing – to
expect anything but a continuation of the debasement of the U.S. currency.
And it would appear quite likely that Europe is soon going to join that
strategy.
Secondly, among the factors that were not present previously that are
gold price positive are the spreading sovereign debt crisis, collapsing
government revenues, and economic stagnation.
So sorry Francesco. Its back to high school
economics for you. Gold is stronger now than it has been in the last decade,
and only fools will believe otherwise.
James West
Midas Letter is the Journal of Investment Strategy of the Midas Letter
Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes
in Canadian-listed emerging companies in the resource sector with a focus on
precious metals explorers and miners. James West is the Portfolio and
Investment Advisor to the fund.
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