All thing considered, it seems clear that the long-term real returns of gold have been poor (compared to stocks and bonds), and I see no reason to expect long-term price appreciation for gold to be above inflation. In fact, as with any non-income producing asset, it would be unreasonable to expect gold to provide significant positive real returns over an indefinite period of time…I would argue that buying gold is a short-term gamble that is completely dependent on the unpredictable vagaries of perception, market psychology and the “greater fool” theory…While it is true that gold can be a good short-term trade and offer superior returns over shorter periods (as has been the case in recent years) I believe that stocks will continue to substantially outperform gold over time. [Let me explain these less than popular conclusions further.] Words: 1258
So says Ted Barac in edited excerpts from his article* on Seeking Alpha entitled Questioning The Case Against The Case Against Gold.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Barac goes on to say, in part:
A recent article by a fellow Seeking Alpha contributor supporting gold investments [see The Case Against the Case Against Gold] stated… [that given the fact that,] historically, gold has been known as an effective store of value… [that should end any debate as to whether or not gold gold was a good investment.] My question is, why would that end the debate? Shouldn’t we examine the extent to which gold has been an effective store of value, and how it has performed against other asset classes? [In this article I do just that.]
Historically, Gold has NOT Appreciated, At All, in REAL Terms
It seems to me that one of the main arguments made by some gold advocates amounts to little more than gold is a good investment because it will outperform any cash that you stash under your mattress (although almost no one actually invests in such a manner).
For example, one of the points made by gold advocates is the observation that: “In Roman times, an ounce of gold would buy you a fine suit and today, an ounce of gold will still buy you a fine suit.” It’s interesting to me how some people hear that anecdote and conclude that gold is a good long-term investment.
In reality, I believe that the more logical conclusion to take away from that statement is that, since Roman times, gold has provided a real return (after inflation) of exactly ZERO. In other words, an ounce of gold back then would buy you exactly the same as today (i.e., it hasn’t appreciated, at all, in REAL terms).
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Cash is clearly a poor long-term investment, which (typically) devalues year-after-year. The reality, however, is that investors tend to put their cash into banks and brokerage accounts where they buy CDs, bonds, and equities — all which, typically, offer real returns over time. This is particularly true with respect to equities (which we will discuss later). This begs the question as to why many gold enthusiasts are terrified about inflation, yet have an apparent aversion to stocks (one of the best long-term inflation hedges that exists).
Historically, Stocks & Bonds Have Had Greater Real Returns Than Gold
A recent study by Credit-Suisse and the London School of Business looked at the real returns of stocks, bonds, and gold from 1900-2011. During that period of time, they found that the real return for stocks (using a global index) was 5.4%, while the bonds that they analyzed returned 1.7%, and gold returned 1.0% (all in real terms). Similar conclusions were drawn in the famous book Stocks for the Long Term by Jeremy Siegel, who has estimated that stocks have provided real returns of about 6.6% over the long-term.
It seems that some of the more passionate gold advocates almost view stocks in the same way that they view fiat currencies (i.e., as some make-believe instruments with no underlying value that are part of a huge Ponzi scheme/conspiracy theory). Of course, the reality is that stocks are real assets that represent ownership interests in companies that own factories, stores, buildings, heavy equipment, and other income-producing assets. Not only do these real assets increase with inflation, but they provide income and dividends while you hold them (unlike gold).
All thing considered, it seems clear that the long-term real returns of gold have been poor (compared to stocks and bonds), and I see no reason to expect long-term price appreciation for gold to be above inflation. In fact, as with any non-income producing asset, it would be unreasonable to expect for gold to provide significant positive real returns over an indefinite period of time (as gold would ultimately cost billions per ounce, even when adjusting back to today’s dollar).
The Underlying Value of the Dollar is Substantial
And what about the view of some gold enthusiasts that U.S. dollars (and other fiat currencies) have no underlying value, and are effectively just a huge Ponzi scheme? Well, technically, the actual physical piece of paper that represents U.S. currency doesn’t have much intrinsic value (nor does a car title, a mortgage certificate, a paycheck, etc.), but that’s not what’s really important. What’s important is the underlying value of the dollar, which is substantial.
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The dollar is the currency in which income taxes must be paid. Whether your employer pays you in dollars, gold, free room and board, Mexican pesos, or equity grants, you have to translate that compensation into dollars and pay taxes on that income in U.S. dollars. Hypothetically, massive demand for dollars would exist, even if the entire country became convinced that dollars were worthless, everyone demanded that they be paid in gold bars, and everyone went to a barter system where no cash was exchanged for goods and services. In such an (unrealistic) scenario, there would still be demand for trillions of U.S. dollars each year, in order for people to pay their taxes. For that reason alone (although there are many others), the dollar has, and always will have, substantial value.
Gold, on the other hand, has limited intrinsic value and is an asset that trades largely on emotion, perception, and the “greater fool” theory. Because gold generates no income or cash-flow on which to fundamentally value the asset, investors buy gold solely on the expectation that someone else will eventually believe that it’s worth more and buy it back from them at a higher price. Such an investment rationale — based purely on emotion and no fundamental valuation considerations — makes me very nervous, although I acknowledge that many very smart people have made substantial profits speculating in gold. Personally, I prefer to invest where I see fundamental value based on expected profits from income-producing assets.
While I see limited intrinsic value in gold, I also see no reason why the scarcity premium that it has carried for centuries will dissipate anytime soon, and it seems reasonable to expect that inflationary type long-term returns (i.e., zero real returns) will continue….I think Berkshire Hathaway CEO and renowned investor, Warren Buffett, best summed up the issue of gold’s questionable value when he famously said:
It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
That’s not to say that gold can’t be a good short-term trade and offer superior returns over shorter periods (as has been the case in recent years). Longer-term, however, I do believe that stocks will continue to substantially outperform gold over time — particularly following gold’s dramatic run-up over the past decade.
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
In all my years of writing about gold, I have rarely referenced specific gold bear articles or posts, but I found myself compelled to break with tradition after reading a recent piece from Zacks Investment Research called The Case Against Gold In Today’s Market. My response below mainly focuses on noting how the gold bear arguments themselves demonstrate that gold is not nearly as different from other assets as the Zacks pieces suggests.
Is gold a commodity or currency? How does it behave as an investment? What are the fundamentals of investing in gold? What are the different ways investors can get exposure to gold in their portfolios? The answers to these questions and many others are answered in this latest infographic from Visual Capitalist.
Some say that the gold price rises and falls, but they are grabbing the wrong end of the stick. It is the purchasing power of national currencies that rise and fall. Here is an analogy to make this point clear. When standing in a boat and looking at the shore, it is the boat (currencies) – and not the land (gold) – that is bobbing up and down. [Let me explain the value of gold further.] Words: 631
Today all currencies are fiat, that is, they are money only by government edict, by the law; they have no inherent value and are not backed by reserves. Because of this central bankers around the world can create/ print new money almost without limit, and as with all markets currency prices are set by the law of supply and demand, and as more dollars, euros, pounds and yen are created, their value falls. [Let me explain the ramifications of such action.] Words: 785
Several years, ago, the very savvy Richard Russell stated that the investment times were changing. He said that with huge debts everywhere, cash flow would be the most important issue for everybody going forward- for business, for investment, and for everyday life. He said that it was no longer a game of “Return on Capital”, but a need for “Return of Capital.” What Richard was saying was that good and consistent investment and income gains would be more difficult for a decade, or so, and that just keeping the same value of one’s savings would be an important goal.
The concept of “value” is extremely important, especially when Dollars are being printed aggressively. This is because the value of your Dollars is falling. Most people look at a Dollar and see a Dollar. They don’t understand that the worth of a Dollar can fall dramatically in times like today.
Gold is not a solution to investing problems. It is an insurance policy against an inflationary explosion. The higher the probabilities of inflation, the more gold I hold. [Let me explain.]
Gold and Silver are not an investment! Let me repeat that. Gold and silver are not an investment! Gold and silver are (excuse the pun) the most “solid” form of money you can possess. Yes, these two precious metals are money!…Don’t fear owning gold my friends. Fear not owning gold and silver, especially if you are a saver. [Let me explain.] Words: 795
The spectacular rally in the gold price over recent years [has] many observers asking if the precious metal has not moved ahead of its fundamentals…[and if it] has not entered speculative bubble territory. [To address that concern] I have calculated the purchasing-power-protection price of gold for the 43 years from 1970 to 2012 and compared it to the average market price for gold in every year [along with some background of events unfolding over each decade during that time period which should prove] useful as a framework for how to think about the [current] dollar-price of gold. [I think you will find it most enlightening. Take a look.] Words: 3973
It would seem that there is a considerable lack of understanding about what the term “safe haven” actually means when it comes to gold. Let me explain just what it means – and does not mean. Words: 740
Comments I have made that “when this [financial crisis] finally ends the big winners are apt to be the ones who have lost the least purchasing power. Keeping score in nominal dollars is likely to be meaningless. Gold tends to hold its purchasing power regardless of what happens to fiat currency.” have prompted questions about a) how to achieve such purchasing power with physical gold when this stage is reached, b) how to go about buying things with gold coins and c) how gold would be utilized under the assumption that a barter system would develop when dollars become worthless. [Let me explain.] Words: 700
We are in the midst of turbulent times, and it seems inevitable that things can only get worse. Most investors are of the opinion that gold is one of a very few areas of safety…however, when we look at historical charts, it is obvious that gold doesn’t always behave in the way we would expect. [Let me explain.] Words: 541
Do you own enough gold and silver for what lies ahead? If 10% of your total investable assets (i.e., excluding equity in your primary residence) aren’t held in various forms of gold and silver, we…think your portfolio is at risk. Here’s why. Words: 625
We are all focused on the short-term and that’s natural, but let’s step back and look at the longer-term picture…We know the debt levels are too high today…but, because less than 1% of world financial assets are in gold, we have yet to really see the gold market react to the massive global money printing binge of the last 10 years. Once the gold market starts reacting to all of this, that’s when gold is going to go exponential. It doesn’t matter whether investors are buying gold at $1,600 or $1,800, it’s irrelevant in the long-run. What’s important is they are invested in physical gold in order to preserve their wealth. [Let me explain why.]
I was taught years ago that “gold is not about price… gold is about value.” Be measured, be balanced and don’t make more of it than it is. Gold is just a tool, an anchor to sound money; to value. [Let me explain.] Words: 1120
Inflation is the central banks’ method of avoiding the pain of austerity. Inflation is the current economic narcotic that is used by modern nations. It’s the old ‘beggar thy neighbor’ system, and it will ultimately result either in all out hyperinflation and a collapse of the fiat currency system or a corrective deflationary crash. Either way, the last currency standing will be gold.
Considering the fact that you can fool some of the people some of the time but you cannot fool all of the people all of the time, is it any wonder millions, both through the Tea Party demonstrations and now the Occupy Wall Street Movement across the country and elsewhere around the world, are protesting the abysmal scourge that fiat currency has brought upon us as a result of that fateful day back on July 25th, 1965. To appreciate the significance of that historic day we must fully understand what fiat currency is and why such a concept is about to implode and this article does just that. Words: 1372
‘Gold Bullion Or Cash’ is a well produced, high quality, educational short video that uses music, images, facts and quotations to show how gold has been a proven store of value throughout history and an important diversification today.
To fully understand gold’s role in an investment portfolio, we need to adopt a new mindset, a gold mindset which is, simply put: gold is not a bad investment, and gold is not a good investment. Gold is not an investment at all – gold is money.
In our travels to the Middle East, the Far East and South and Central America [we have found that] most people in those parts of the world see gold as the protector of wealth [as opposed to] in the West where it is viewed as a commodity for speculation… [That shouldn’t be the case. Let me tell you why.] Words: 2159
A look at the gold price over the past 177 years reveals that – surprise, surprise – gold could be the safest investment out there! Words: 1377
Have you ever wondered what money really is [and why we need to own some gold as a result]? You’ll notice that everyone you read has a strong opinion , but who’s right? [Let look at the situation and see if we can come to an answer that we both can agree on.] Words: 3086