The Case for Gold

by | Dec 29, 2010 | Howard Katz | 17 comments

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    The Case for Gold

    The establishment argument against gold comes down to the statement that it is a collectable that earns no yield. Art, rare coins, stamps and gold and silver bullion do not earn a yield. Stocks, bonds and real estate earn yields, so the prudent investor should focus on these assets rather than gold or precious metals.

    First, let us examine a hole in this argument. Let us look at bonds and other fixed income investments. The best instrument here is T-bills because they are virtually risk-free (not counting the risk from the depreciation of the currency). A study of the yield on T-bills going back to 1933 (which is the beginning of the modern monetary system) shows that the yield paid on T-bills bought at almost any time over the past 75 years has been completely eaten up by the depreciation of the currency. For example, right now you can buy a T-bill yielding 1%. But the (official) Consumer Price Index is rising by 4% per year. So at the end of 12 months time, you receive $1,010 (from your original $1,000 investment) and can buy goods which at the start of the 12 month period had cost $970. In reality, your money has shrunk in value and you have received negative interest. It hasn’t been this bad all the time, but the average over the past 75 years shows a return of (very close to) 0% real interest.

    This eliminates T-bills as an establishment investment, and it pretty much eliminates any riskier fixed income investment as well. Because all you are receiving beyond the T-bill rate is a small risk premium. Yes, you get some extra return, but you have to take extra risk. The game is not worth the candle. And if you try so-called inflation protected Treasury securities, they are only protected against the “inflation” reported in the official Consumer Price Index. Interestingly, it was right at the time that these were introduced that the Bureau of Labor Statistics began to introduce fraudulent statistics into the CPI so that it no longer truly measures the rate of price increase in our society.

    What is needed during this period when the U.S. currency is depreciating (as measured against goods) is an economic good which protects you against currency depreciation and which also has a yield. Stocks have yields because (most of) the companies have earnings. Real estate usually has a yield (unless it is raw land). In both of these cases, it is possible to protect yourself against the depreciation of the currency and still earn a return on your capital.

    So far the establishment argument is looking good. Both stocks and real estate, like gold, can protect you against the depreciation of the currency. But unlike gold they pay a yield. The problem with this argument, however, is that it is true only for the long term.

    Starting with the Kennedy tax cut of 1963, budget deficits and the creation of money became the operating policy for both political parties. Indeed, the (official) Consumer Price Index has risen every year since that date. However, different goods react differently to the easing of credit and the printing of money. The result of this has been the development of what I call the commodity pendulum. First, commodities lag behind the rise in other prices and become undervalued. Then they play catch up and rise rapidly. When they go too high the cycle starts again. For example, commodities were undervalued in 1971 and dramatically outperformed stocks through the decade of the ‘70s. In the ‘80s and ‘90s, the situation was reversed; commodities declined, and stocks rose. Starting early in the new century commodities were once again undervalued and began another rise, and this will soon lead to large scale declines in bonds and stocks. That is, the first part of this century will be a repeat of the 1970s.

    So although the establishment point is correct for the very long term, it is too long for practical trading. Yes, stocks can give you protection against the depreciation of the currency as well as yield. But that did not help the stock investor from 1966 to 1982 because he lost 70% of his capital in real terms.

    The argument for gold now is the same as it was in the early 1970s. Gold, and other commodities, are coming off a giant oversold condition. Over the ‘70s, gold multiplied by a factor of 25 times. What will happen during this swing of the pendulum cannot, as yet, be predicted. But it is likely to be quite similar.

    Take the establishment supporter who bought stocks in 1966. It was the recognized “wisdom” of that day to buy “good, sound stocks for the long pull.” They laughed at the foolish gold bugs buying gold stocks with the price of the metal at $35/oz. Gold, after all, was a collectable. This situation is repeating in our day. The same forces which pushed gold upward then are pushing it upward now. The ethanol bill plays the role of the Russian wheat deal. The establishment type who buys “good, sound stocks for the long pull” today is quite likely to sit through a 70% decline in real terms over the next dozen or so years.

    We all know what the establishment did in the 1970s. When gold raced over $800 in January 1980, they said, “We will pretend that this whole affair never happened. It is too embarrassing to admit that we were wrong and the gold bugs were right.” Those who do not learn from history are condemned to repeat it. And repeat it (the seventies) they are.

    But when the commodity pendulum is finally over (and that will be quite some time in the future), and the cycle is ready to switch back in the other direction, when the day comes that gold is overvalued and stocks undervalued (similar to 1980-1982), I will be perfectly happy to get out of gold and buy stocks again.

    But as I remember the advice of the economic establishment over the past generation, they were as bullish as they could possibly be on stocks in 1966. And then they turned as bearish as the gloom of night in 1982. I am confident that they will do the same thing on this second swing of the commodity pendulum.

    Is gold the true store of value in uncertain times? Will the impending flood of inflation destroy my financial house? How can I protect my wealth with gold and precious metals? These are the type of questions addressed in issues of The One-handed Economist. Subscriptions are available for $300/year online at, or for $290 ($10 cash discount) by sending your check to The One-handed Economist, 614 Nashua St. #142, Milford, NH 03055.

    Thank you for your interest.


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      1. Gold at 35 an ounce….Silver is almost there now.  I didn’t know then what I know now so I didn’t get in on 35 an ounce gold. But I did get in on a lot of silver at under 15.  Still buying it on the minor pullbacks though.

      2. when gold and silver crash through the floor new crisp uncirculated federal reserve ten dollar notes will prevail intact and untarnished. save all the new ten dollar notes you can before they become scarce and cost more than ten dollars. remember that they all are backed by the full faith and credit of the united states’ government  -  so unlike gold and silver junk these ten dollar bills are insured against calamity and will never rust.

        look at the gold crash after 1980 when uninsured gold went from $800 to $200 and they was slight inflation in these years also. this inevitable upcoming gold and silver crash will soon happen again when the united states regains it’s proper position as leader of the entire world’s economic strength.

        in the meantime do everything you can to defeat the chinese currency gangsters and their mexican girlfriend real estate agents who have caused the current small downturn in our magnificent american economy. support henry kissinger, robert rubin and larry summertime as well as our wall street bankers and all their monetary expert advisors in israel who are planning to restore our economic welfare by chasing taliban drug lords back into pakistan where they belong. this will preserve the afghanistan poppy fields for americans who buy gold and silver and fail to save ten dollar bills.

      3. In mid 2009 I had a conversation with a neighbor about the risks of stocks and bonds.. he was pretty much at a loss for what to do with his money after having been hammered by the market collapse up to that point… I threw gold out their as a possibility to hedge against inflation and continued (global) government instability… he said it sounded great, but it had already started rising since the 2008 bottom and he said “it’s gone up way too much recently.” He was afraid that he would be buying another top and getting cleaned out yet again.

        My view – because I don’t give advice (usually) – was that gold/silver, even in the form of stocks or ETFs, could act as a hedge against his other assets – including his cash assets… I told him that the contrarian experts – non mainstream – were recommending anywhere from 10% to 20% of one’s portfolio be in PM related assets… He didn’t seem very enthused.

        I am not sure what my neighbor did, but I have continued to accumulate gold/silver assets since 2007 – making my largest move into PM’s between November 2008 and June 2009…

        I see silver above $30 today, which considering i started moving in at $12, seems like it is a “top.” Heck, it could be, but in my view we’re still in the earlier stages of this “crisis.” When i get that nervous feeling about buying any more silver/gold I just think back to what my neighbor said, and what happened with PM’s since then until today…. Sure, $15 – $20 silver seemed like a lot when using $12 as a reference point… and $30 seems like a lot when using $20 as a reference point…

        But really, price should not be the primary concern here in terms of deciding whether to buy it today or not… I continue to look at global trends – namely government intervention into so-called free markets – and I keep coming to the conclusion that things will get much worse before they get better.

        That being said, $30 doesn’t seem so high when you consider gold/silver historical ratios, supply/demand issues, depreciating paper currencies and continued commitments from our central bank to monetize as much US debt and bail out as many failing institutions as is necessary to keep this ‘recovery’ going.

        I haven’t bet the farm on gold/silver, but what little extra funds I do have left will continue to go into this asset class after food, ammo, prep gear and skills development.

      4. Buy all the gold and silver you can…Whee!! This investing stuff is easy!

      5. I love tacos too GMG!

      6. I became interested in silver about a year and a half ago.  I have been stocking food & supplies, and silver, but not gold.

        Now I think food is a better investment than gold or silver right now – because I think there is an ice age coming and it is going to take some time to alter our food strategies – and many will (unfortunately) starve before that happens.

      7. People need to open their eyes…..Gold has been “real” money for over 5000 years.

        Look no farther than what is happening to pre-1982 pennys.   The  melt value alone is currently 2.8 cents per coin.   Silver and gold has done even better, over the years since  1933,  when comparing to fiat US dollars.

        Gold offers no yield????……… …. I guess it doesn’t,  but what does 1000% yield in fiat dollars give you,  if at the end,  it won’t buy you what you could, before the 1000% return?   Think Zimbabwe.

        You can take all your yields in fiat, and I will take my no yield gold…….see who eats better next year.

      8. I will need ice down in the islands to keep drinks cold.  Ag  82%, Au 30% ytd. 

      9. 82% & 30%?  Has food gone up 82% or 30% this year?  I’m off grade.  I don’t think my floor can hold any more buckets of food.  I welcome cooler weather, my freezers won’t have to work as hard.

      10. They are still giving away nickels lostinmissouri.  Those 1943 copper pennies are getting rare…..

      11. Love my gold, love my silver.   Just got paid for a week long job I did in dimes……..600 of them.   This is fun! 

      12. 64 or prior?

      13. 1500 & 31 anyone?  I hope Jim is right next year.

      14. Most of them are Mercury, the balance are Roosevelt pre 64.  I know my silver.

      15. 12 tubes, you did well.  Real money.

      16. There’s a run on physical silver @ Comex.

      17. b on!
        profs say “us total debts c$200 tril, tom, 12zero
        or 13x gpd $14t yr.
        m fund co says $75t,’ ps editor: its H owie.. r i p?

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