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How To Lie With Gold Statistics
In 1954, journalist Darrell Huff wrote a clever book called “How to Lie with Statistics.” Replete with charts and humorous art work, the book is thin, easy to read and profound. It has been translated into 22 languages and is required reading in many college statistics courses. One of the most important warning signs is the use of charts to amplify what the author wants to say. You can create any trend you want to create by choosing the starting and ending dates and the amplitude of the vertical (y-axis) calibration.
“Let me choose the dates
The chart will start and end.
And I’ll create a chart
That proves my favorite trend”
This came to light last Monday, April 4, when The Wall Street Journal warned that gold’s mini-bull market may be over. In a page 1 column in the Money & Investing section (“A Warning for Gold Bugs: This Rally Won’t Last”), Steven Russolillo begins by warning that “Gold investors should enjoy the party while they can. The good times are probably coming to an end.” His basic argument is that too many investors are bullish: “Such enthusiasm and unanimity suggests gold’s shine is set to dull sooner rather than later.” He also repeats the shopwron Wall Street bias that gold has no intrinsic value: “gold doesn’t generate any income. Valuing it is virtually impossible.” Then he includes this truncated-time chart:
Choosing the starting point of this chart is very clever. He begins in 2013 – gold’s worst year since 1981 – instead of giving the reader a longer-term view. His text reflects this same time-bias: “even amid a strong first quarter, gold is still off about 35% from its peak of 2011 just shy of $1,900 an ounce.”
An observer with a different bias could say that “gold is up 326% since December 31, 1999, while the S&P 500 is only up 40%.” A fair analyst would say gold wins some years, stocks win in other years, and history shows that it pays to own both, with a majority position in stocks and a hedging role for gold.
If you can choose the starting and ending point, you can create any trend you like. How about we look at the price performance of gold since the year 2001 to show the opposite trend. Here is the tale of the tape for gold in terms of nine currencies in which gold is produced and most often traded, namely (from left to right) the U.S., Australia, Canada, Switzerland, China, the Euro-zone, Great Britain, India and Japan.
In the Journal, Russolillo begins his chart in 2013 – gold’s biggest fountain of red ink in the last 15 years. He could have started in 2001 to show a full 15-year track record, but he chose 2013 for obvious reasons.
He also says that “the turbulent times that helped push gold higher at the beginning of the year have largely dissipated.” Oh, really? Maybe terrorism will never strike Europe or America again. Maybe ISIS will flame out. Maybe the new nuclear threats will never materialize. We’ll have to see about that. The erratic policies of the leading Presidential candidates alone should give investors cause for added concern.
He also says “Financial markets have calmed, economic data have been better and overseas action has steadied.” The jury is out there, too, since much of the stock market’s recent recovery involved short-covering, a flimsy foundation for further gains in an environment when corporate earnings are declining, and U.S. GDP growth is fairly anemic with the Atlanta Fed’s GDPNow predicting 0.7% quarterly growth.
Russolillo concludes: “A return of market panic can never be ruled out, of course. Barring that, it is last call for gold bulls. As much of the past five years have shown, the hangover isn’t pleasant.”
From someone who admittedly doesn’t know how to value gold, this conclusion is inevitable. The same bias can be found in reverse – with the many “gold bugs” who undervalue stocks vs. gold. Unfortunately, many gold merchants similarly disrespect stocks and try to warn investors of a coming stock market crash to promote their gold sales. We don’t do that. We’re one of the few gold marketers who also believe that investors should put most of their money into well-selected stocks. Navellier & Associates is one of the leading champions of the detailed statistical and fundamental analysis of the leading stock markets. We have advocated a majority weighting in stocks and only a small (5% to 10%) position in precious metals.
New Demand Factors in 2016
Contrary to Wall Street’s bias, gold can be analyzed in traditional terms of supply and demand. The newly-mined supply may have peaked in 2015, with many mines being closed after the chronically low prices of the last three years. Meanwhile demand is rising, due in large part to the negative interest rates in Japan and most of Europe, along with the Federal Reserve’s retreat from its interest rate-increasing plans. Gold demand at the U.S. Mint increased 68.2% in the first quarter of 2016 vs. the first quarter of 2015. Due to negative interest rates in Europe, gold demand at the Austrian Mint increased 45% in 2015.
In China, the world’s #1 gold producer and consumer, demand is rising as a safe haven from their many financial challenges. There is great volatility and lack of regulatory safeguards in China’s domestic stock market and real estate market. There are also rumors of a major devaluation of the Chinese yuan, which is driving many Chinese to protect their savings through gold, which cannot be devalued by fiat.
In Wall Street Journal article (“China Investors Grab Gold: Hard-nosed buyers are stocking up on bars and coins, helping boost the metal’s price,” March 29), reporter Biman Mukherji reports that “Chinese investors have been snapping up gold bars and coins” due to global unrest and currency erosion, not just traditional jewelry demand. The biggest rise in gold demand, according to Padraig J. Seif, CEO of Finemetal Asia, a large Hong Kong bullion dealer, has been a 10-fold increase in 250-gram bars (worth almost $10,000). Sales of the huge 1-kilogram bars (2.2 pounds, worth almost $40,000) are up by 50%. Seif says his company has sold more gold in the first three weeks of March than in all of February.
The World Gold Council’s quarterly gold-sales numbers for 2016 won’t be published for a while, but their latest statistics for the fourth quarter of 2015 showed that Chinese investment gold sales (mostly bars and coins) were up 25% from the same quarter in 2014, while sales of gold jewelry were down 1%. This switch reflects the rise of gold as a competing investment to stocks or currencies, not as a decorative item.
Meanwhile, Russia is buying gold almost every month, and they have good reason – the Russian ruble has been chronically weak during the last two years of falling oil prices. Russia’s central bank bought more gold in February than in any month since January of 2015. This switch from paper reserves to gold is paying off. Bloomberg reported last weekend (“Gold Rush by Russia Makes up for Billions Lost in Currency Rout” on April 3) that “Gold’s biggest quarterly surge since 1986 has all but erased losses the Bank of Russia suffered by mounting a rescue of the ruble more than a year ago.”
The World Gold Council reported that 588.4 metric tons of gold were bought by the world’s central banks in 2015, up slightly from the 583.9 tons they bought the previous year. Russia was the #1 buyer in 2015. China was the #2 central bank buyer, adding 104 tons in the second half of 2015 alone. Kazakhstan is the third most active buyer, adding smaller amounts but buying gold steadily for the last 40 months in a row.
We’ve also seen a rise in the sales of “paper gold” ETFs. The Wall Street Journal reported last week that gold holdings at the biggest gold ETF, SPDR Gold Shares, are at nearly the highest levels since late 2013, as gold ETFs bought a net 300 metric tons last quarter, the most tonnage added in any quarter since 2009.
While we at Navellier Gold have an admitted bias for gold as an investment hedge, we don’t try to talk down competing investments like stocks and bonds. The only investment we tend to disparage is the motley choice of fiat currencies around the world, many of which offer “no income” – just like gold – but gold has the long-term advantage of prevailing against any and all paper currencies in the history of man.