If They Don’t Own Gold, Don’t Trust Their Opinion on Gold
By Taipan Publishing
As an asset class, gold stirs the passions. Some folks love it, and others despise it. Be wary of those who will never own gold.
Gold has again broken out to fresh all-time highs. (Well… nominal highs at least. To break inflation-adjusted highs – which will happen sooner or later – gold will have to trade above $2,400 per ounce.)
The case for gold is simple. After a quarter-century of fiscal irresponsibility, we have spent all we have… and spent yet more on top of that. Now the credit lines are nearly tapped out.
Against such a backdrop, in which debt levels remain high and growth remains stubbornly low, there is little for desperate politicians to do but print, print, print… and the only “neutral currency” not subject to the ravages of a printing press is gold.
If they don’t own gold, don’t trust their opinion on gold.
Gold is an emotional precious metal. As an asset class, it stirs the passions. Some folks love gold, and others irrationally despise it. Either way, investing and trading decisions tinged with emotion are not to be trusted.
As gold has marched steadily higher, an amazing amount of hand-waving and pooh-poohing has taken place… most of it from individuals who have never owned gold in their lives and likely never will. (If gold is too high priced for these dismissive souls now, at a measly twelve hundred bucks and change, how on earth will they bring themselves to buy in at $2,000… or $4,000… or higher still?)
In many ways, gold is despised because its ascendancy is an affront to an established way of life. A rising gold price means the system is not working. It means the old “buy the dips” mentality, in which the same old fiscal fixes continue to work, has gone by the wayside. Relentlessly rising gold means the easy way of life established these past 25 years – a “simpler time” that many money managers wish they could return to – has gone the way of the dodo.
So we hear over and over how gold is a “barbarous relic.” (Funny – no one calls the Federal Reserve system a relic, though they’ve been consistently screwing things up since 1913.)
We also hear from sour-grapes types and knee-jerk attention seekers that gold is just a fad… that the infatuation will die down any time now.
But these viewpoints are rooted in emotion, not facts. The newspaper columnist who turns his nose up at gold is not merely dismissing an asset class. He is expressing discomfort at the pressing onset of a strange reality he does not understand.
Meanwhile, the market “contrarians” who bellow about gold going lower – even as it marches ever higher on daily, weekly and monthly charts – are merely grasping for straws of attention, trying to restore old guru glories lost.
There is something else important the naysayers and doubters fail to understand: Gold is a low-cost insurance policy.
Ask yourself the following. How much faith do you have in the Federal Reserve? How about the Bank of England (BOE), the European Central Bank (ECB), or the Bank of Japan (BOJ)?
Our financial and political leaders have not just performed poorly in a time of serious crisis, they have performed spectacularly badly. Who is to say the powers that be won’t bungle things worse – much, much worse – when the full-blown “Act II” of the global financial crisis hits with full force?
Against the backdrop of breathtaking financial, social and geopolitical risks the whole world faces now, the truly crazy stance is not owning gold. Those who blithely assume everything will work out are like Florida beachfront property owners, happy to forgo insurance as the hurricane bears down.
The other open question in respect to gold is one of supply and demand. Some feel there is more than enough gold to go round at current levels. How can gold be worth such an exorbitant price, these critics whine, when all it does is sit there?
Others, take a different view:
What’s the price of the last ticket on the last train out of Paris on the night the Germans march in? Whoever is carrying the most gold, diamonds and fine art will get it, and that will be the price.
Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production.
Speaking of central banks… “Last year, foreign central banks were net buyers of gold for the first time since 1997,” CNN reports. “India, China and Russia have been the biggest buyers. And more recently, the Philippines and Kazakhstan jumped into the fray with big purchases of the precious metal during the first quarter…”
There are at least three different motives for owning gold:
- as speculation
- as investment and
- as long-term insurance policy
Speculation is the motive most sensitive to price changes, insurance the least.
Whatever your motives and methods, we would advise considering gold not just as a standalone asset, but in the context of other potentially risky assets you own… like the fiat currency-denominated cash in your portfolio, for example.
All Things Considered – John’s Commentary:
It is true, gold is a very emotional asset. No one bickers over whether or not to hold almost any other asset or asset class, except gold. Why? In my opinion, we all desperately want to be right.
Some people do not own gold because they truly believe that economically, everything will turn out fine. Others have trust that the government will catch anything before it gets too bad. Still others shun gold, because to buy it would mean that they would have to prepare for potential contingencies that they would rather not face. Finally, others know that if they were to buy gold, they may have to admit their original premise was wrong.
One would be foolish not to carry homeowners insurance, as is the same with life insurance. Gold is portfolio and livelihood insurance. And, if you never have to use it for that purpose, you still have about what you paid for it – maybe, a lot more!
Action to take: The next levels: Gold – firmly through $1,250 to $1,320 (by year end) and on up to $1,640. Silver – will take some time to firmly penetrate $20.00 and then $20.67 on to $25 (by year end).
What to buy now: The new 24k gold Buffalo coin and silver Peace Dollar rolls, when you can find them.
Quote of the day: “With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” – F.A. von Hayak
