The “Pet Rock” Critic Strikes Again

gold-bars-1Last year at this time, The Wall Street Journal’s Jason Zweig – who calls himself “The Intelligent Investor” – called gold a fetish (a “pet rock”) more than an investment.  In his weekend column this year (July 9-10, 2016), he wrote a new column in his defense, titled “Gold: It Remains a Pet Rock.” First off, he admitted that his timing looked bad as gold is up over 20% since last July vs. just 2% for stock indexes, but he responded by making the same major mistakes that he made last July.

#1-He is blind to gold’s major virtues.  He only calls gold an “insurance against chaos.”  This is like the blind-folded man who only touches one part of the elephant – the ears, trunk, legs or tail.  He argues that the “the world is certainly in chaos,” so gold’s rise is temporary.  However, gold is primarily a hedge against currency erosion, not just a crisis hedge.  Currency erosion includes high inflation (as in the 1970s) or deflation (now), very high interest rates (as in the late 1970s) or negative interest rates (now), money printing (1970s) or “quantitative easing” (now).  Gold is a proven winner against every currency ever printed, including the 1,000-year-old British pound and the 225-year-old U.S dollar, which has shrunk 98.5% to the price of gold in the last century.

#2-He continues to use 1980 as a base price for gold’s performance.  He takes the absolute peak day of gold in January, 1980 (adjusted for inflation) to show that gold has gone nowhere in the last 36 years.  A more impartial (“intelligent”) analysis would take gold’s fixed price of $35 from 1934 to 1971 as a base price, or he could pick a random price from 25 years ago or 10 years ago for a fair comparison, as we do in this newsletter.  For instance, gold is up 317% since 2000 vs. 45% for stocks (using the S&P 500).  Since 2005, gold is up 213% vs. 86% for stocks.

#3: Gold is still the only commodity officially included in national reserves.  The central banks of the world can only hold cash (official currencies) or gold.  No other commodity is included in the official foreign exchange reserves of major nations.  Currently, global central banks hold 33,000 metric tons of gold and they are adding about 500 more tons each year.  They may not officially subscribe to the gold standard, but they are smart enough to invest in the one commodity that beats all paper currencies over time.  Private investors are also making the same choice, exchanging their increasingly worthless paper money for the proven benefits of gold.

As a result of this bullish sentiment on Wall Street and worldwide, the SPDR Gold Trust (GLD) – the largest gold exchange-traded fund (ETF) – took in a net $12.2 billion in the first half of 2016, more than all U.S. stock ETFs combined.  In June alone, GLD took in $3.3 billion new money.

In the last year, Japanese interest rates have turned negative and European interest rates have turned more negative than they were back then.  In addition, U.S. Treasury long-term rates reached all-time (225-year) lows.  This gives gold more than an “even playing field” with cash.  It gives gold a clear advantage.  How can an “intelligent investor” ignore this new reality in 2016?

Ignoring $12 trillion in negative interest rate bonds is like ignoring the elephant in the room.


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5 years ago


Douglass Graem
5 years ago

Gold may be a commodity but GOLDMINERS are living organisms, with staff dedicated to make money for shareholders.
The largest ABX has been accumulated by the likes of Soros. That’s good enough for me.
Period. End of discussion.

Bob Osterstock
5 years ago

Jason Zweig is a very credible financial journalist and his views on investments in precious metals are valid. Yes, you can always pick your time-frame and make a case for any investment. But I like the perspective provided in Jeremy Siegel’s “Stocks for the Long-Run” (5th edition). In his first chapter, he provides a very long-term history on real returns (i.e. adjusted for inflation) going all the way back to 1802. A $1 investment in gold in 1802 would be worth $4.52 in 2012 (a 0.7% annualized real return). Stocks, by comparison, would have grown that $1 into $705,000 in real purchasing power (a 6.6+% annualized real return). Consistent with its “inflation hedge” reputation, gold provided virtually no real return until the 1970’s when inflation became significant. But even then, the real return to gold has been minimal. So it comes down to how much future inflation you believe we will experience: If you believe we are about to break out of this ten year period of very low inflation, then by all means, consider increasing your gold/silver positions. But if you believe we will continue to see low inflation, be prepared for very sparse returns on your investment. So the question you must answer is: How much of my portfolio can I hold in assets with an expected return of close to zero?

The problem with gold/silver as “investments” is, as Joe McHugh notes, that they have no inherent “productivity”, i.e. they don’t have the ability to create real wealth, only to perhaps preserve it. Investments in stocks are by contrast an investment in the productivity of capital in our economy. And since stock investments are in reality claims on the productivity of real assets (i.e. businesses), stocks also provide effective protection against inflation in the long-term as the data in Siegel’s text (among other sources) clearly shows. While stock investments are inherently risky year-to-year, they have been remarkably consistent in delivering real returns on investments of 10 years +. But if you can’t stand year-to-year volatility, then stocks may not be your cup of tea.

I’m not bashing precious metals as a portfolio component. I’m rather just suggesting that the long-term history suggests that you will not likely grow your wealth with those assets. So “over-allocating” to such assets can be expected to significantly suppress your overall returns. Of course, the future may be very different from our long-term history; that’s a bet you must make.

Joe McHugh
5 years ago
Reply to  Bob Osterstock

Bob Osterstock, you also brought up some good points about owning gold. First of all, individuals buy gold for the same reason that the central banks do, namely fear of a “disruption” in the world currencies. Let’s face it, gold is a hedge against high impact events in the world economies.

There is also another aspect to owning gold. China wants to have drawing rights on the International Monetary Funds organization. The people who control that organization require reserves of preferred currency, such as dollars, or reserves of physical gold. That’s why China has been buying tons of the stuff recently.

World recognized economists maintain that gold is already the defacto money of the world economies. There is simply nothing else, besides American dollars, that enjoys absolute respect as being a medium of value.
Example: Germany recently attempted to repatriate its gold being stored at the Gold Depository in Manhattan, New York. They got a rude surprise! The Gold Depository did not have enough gold to honor the demand. The Gold Reserve has been using the gold in the depository, to finance world trade. It uses a practice called “hypothecating” and rehypothecating to facilitate world trade.

The Gold Depository issues gold certificates in place of actual gold to accomplish its agenda. The problem is that it issued more than one gold certificate for each gold bar on hand. It actually issues lots of “certificates” for each gold bar! W.T.F., you might exclaim, how can the Gold Depository get away with such behavior. Well, this is how. All of the world economies understand the practice and condone it because ……wait for it….it helps boost their international trade transactions.

Germany was told that they would receive 100 tons of gold each year until they exhausted their holding in New York City. Guess what? Germany only received 50 tons the first year. Yup, they had to renegotiate to a lower return figure due to a lack of gold in the depository vaults. Isn’t rehypothecating a fun word? Well, not if you want your physical gold back.

It’s the behavior of the world economies that makes gold so desirable. The Central Banks cannot resist printing their currencies out of thin air! This is the main reason that all currencies suffer from inflation to one degree or another.

Chances are, that everything concerning the various mediums of value, (currencies), will sail along on an even keel. Never the less, there is that remote chance of another international fund “event” that will shake the world economies. When, not if, that eventually happens, holding a percentage of one’s assets in gold will keep one solvent. Gold is always welcome, especially when things “go bad” That’s what I meant about the fear factor. .

Rich Walton
5 years ago
Reply to  Bob Osterstock

My father always told me that the real reason to have gold is not to make money, it is to have money.

5 years ago

I’ve been reading everything I can about gold and silver, and discussing both on line and in personal contact, the potential of both gold and silver. (Please correct me where I’m in error)…. I’ve come to the conclusion that gold under $1250 and silver under $20 have minimal downside risk. The part of a strategy I’m still working on is a means of selling metal at full market value. With gold, because purity can be in question, one would have to establish purity, and that means having access to a reputable dealer. With old 90% silver coins and silver dollars, on the other hand, it’s not that difficult to find access to a dealer who will pay the full value, no question about authenticity.

So, Mike, I appreciate all the positives you express for us about investment in metals. But what we need is more discussion of (1) isn’t there risk in investing in metals we don’t have physical possession of and (2) how do we establish a strategy to sell our metals at full value?

Joe McHugh
5 years ago

Mike Fuljenz wrote yet another informative and astute article about the metal known as gold. He pointed out that gold maintains its intrinsic value no matter how the world’s currencies perform. In other words, gold is the pluperfect hedge against the ups and downs of the world currencies.

Never the less, one can’t “make money” by holding gold. One only maintains the value of the money used to buy the stuff, at the time of the purchase. To make money, you have to invest in risky items such as stocks and bonds. You might realize a profit with such investments or you might lose your shirt, according to the clarity of your crystal ball.

There is no risk to owning gold because of one immutable characteristic of the metal, it is difficult to find in the crust of the Earth. That alone makes it an ideal medium of value because no one has yet found a way to “print” gold.
Never the less, gold is not rare in the universe. It’s everywhere, and huge amounts of it are right under our feet, about 4,000 miles down. When the Earth was forming, all of the heavy metals sank to the center of the Earth.

You might ask where the gold, that we see, came from. It arrived much later in the Earth’s history in the form of asteroids. The gold mines in South Africa are evidence of one such asteroid impact. The locations of those mines form a rough circle across South Africa. Gold is everywhere, but most of it is in tiny quantities in the ground and even in sea water.

Ironically, the metal gold is not otherwise all that useful to mankind. It is used in electronics, dental work, jewelry, etc. but platinum and silver are much more useful in a practical sense. Politicians don’t like gold because they can not manipulate it as a medium of value. Politicians know that a return to the gold standard would address many of the problems with our money systems, but they could not play fast and loose with it like they now do with paper money.

The chances of our returning to a gold standard are about as likely as seeing the politicians vote for mandatory term limits, namely slim to none.

Ivan Berry
5 years ago

And since January, silver is up almost 50% by this date, 7-15-16. Known as “the peoples money,” instead of bank reserves, it is more useful by being of smaller value as, a gold bar may buy a house; a quarter ounce of silver may buy a gallon of gas.

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