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The 12 Biggest Mistakes the Media Make When Covering Gold Markets
Now that the gold price has fallen enough to qualify as a “bear market,” the press seems to be all over the story. They missed the 10-year rise from $255 in 2001 to $1922 in 2011, but after gold fell to the $1300s last week, we’re hearing about what a terrible investment gold is now… and throughout recorded history!
Let me begin with a piece by the influential New York Times economic columnist, Paul Krugman, who wrote a column on April 11, called “Lust for Gold.” He crowds a lot of misinformation into one brief column, encapsulating at least five of the most commonly-spread myths about gold as an investment.
Myth #1: “Gold is Not a Safe Investment.” In his April 11 column, Mr. Krugman said, “historically, gold has been anything but a safe investment.” To prove that outrageous point, he focused on the 20 years (1980-2000) when gold’s price fell. Of course, you can assert the same thing about stocks by looking at 1929-1949 or the more recent 1999 to 2009 “lost decade” in stocks. When it comes to performance, you can prove any point you want by choosing the most favorable starting and ending dates, as I once wrote:
You can draw dramatic charts
That show dramatic trends
By choosing when the data starts
And when the data ends
So, let me choose the dates, Mr. Krugman: Since America was founded in 1776, gold held its value when all of our early paper currencies – like the Continental or Lincoln’s Greenbacks – failed. In the 100 years since the Federal Reserve was born, gold has risen from $20 to over $1400, up 70-fold. Since the dollar was untethered from gold in 1971, gold has grown 40-fold, from $35 to $1400. In the last 12 years, gold has risen every year. For the first 12 years of the 21st century, gold rose 510% vs. 8% for the S&P 500.
Of course, both stocks and gold are great, long-term, but don’t say that gold has been “anything but safe.”
Myth #2: U.S. Gold Investors are “Bugs” (to be squashed?). Throughout his April 11 column, Krugman refers to gold investors as “bugs.” Krugman regrets the “recent rise in goldbuggism,” implying it is a cult. But most gold investors believe in moderation, a balanced portfolio, with the largest portion in stocks but a small (5% to 10%) position in precious metals and related investments. Most Americans own no gold, so the gold “bug” is not that contagious. In the meantime, there is no equivalent term for fans of other investments. Is Bill Gross a “bond bug” or Jeremy Siegel a “stock bug?” Are landlords “mortgage bugs”?
Myth #3: Gold has No Intrinsic Value. Krugman maligns gold as just “a decorative metal” with little practical value – but isn’t that even more true about paper? Krugman ignores the vital role that gold has served throughout recorded history. Aristotle favored gold as money since it is durable (it will not corrode over time), portable (carrying large values in small weights), divisible (malleable) and it is intrinsically valuable (rare and desirable). This diagnosis has been proven throughout the life and death of nearly every paper currency ever invented. America has one of the best and longest-running currencies in the world but a 1913 penny is now worth almost $1 (in gold terms) and a 2013 dollar is worth 1.4 1913 cents.
Myth #4: The Case for Gold Relies on Rising Inflation. In his April 11 article, Krugman wrote, “How can we rationalize the modern gold bug position? Basically, it depends on the claim that runaway inflation is just around the corner.” That’s not true. The case for gold depends on many other factors. Gold rose from $255 in 2001 to $1920 in 2011, despite a decade of hardly any significant inflation in Europe or the U.S. Gold has raised because of more demand from a variety of sources – more central bank buying, new gold exchange-traded funds (ETFs) and billions of people in China, India and other emerging markets who are finally able to afford to buy more gold jewelry, coins and bars for their savings and investments.
There is also some confusion surrounding the word “inflation,” a term originally denoting an increase in money supply – not just prices. The word has come to mean “rising prices,” but pundits make a mistake when they view inflation through the prism of prices alone. Monetary inflation usually causes price increases, but not all price gains are equal. Current inflationary policies at the Fed have fueled inflation in asset prices – like stocks, bonds and real estate – while consumer price inflation has remained muted.
Myth #5: The Euro is the New Gold Standard. In his April 11 column, Krugman said, “the modern world’s closest equivalent to the classical gold standard is the euro, which puts European countries back under more or less the same constraints they faced when gold ruled.” This is Krugman’s most outrageous statement. There is no gold backing to the euro, and several euro-zone nations have violated all of those “constraints” with impunity. Perhaps Krugman’s statement reflects his faith in the central planning of the currency czars of Europe, but the euro-zone is hardly the paragon of fiscal austerity and virtue he claims it is. The euro was born on January 1, 1999 at an IPO price of $1.18. At the time, gold was $285 per ounce. Since then, the euro has risen by only 10%, to $1.30, but gold is up about five-fold (+400%), to $1425.
Some gold “bugs” (there’s that term again!) favor a return to a 100% gold standard, such as Britain had before 1931 and America before 1934. Besides being politically impossible, a return to the 100% gold standard of pre-1931 might be impractical, due to all the currency derivatives in circulation these days. However, we have the next best thing – what I call a “de facto gold standard,” in which the citizens of more and more nations (most recently, China) now enjoy the freedom to buy gold as an alternative to paper money. In a sense, gold investors around the world can now discipline their governments via gold.
Bonus Myth: A $1 Trillion Platinum Coin Will Balance the Budget: I won’t give this idea full “myth” status, since I can’t imagine any sane person believing it. It started as a joke and almost ended as a real coin. During the big debt-ceiling debate of August, 2011, some bloggers jokingly suggested that America “mint” a $1 trillion coin to magically raise the debt ceiling by adding $1 trillion to the Treasury’s balance sheet. The idea was lost until talk of the “financial cliff” arose late last year. Then, on January 7, 2013, Krugman endorsed the idea, writing: “Should President Obama be willing to mint a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely…By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.”No economic harm at all? This kind of thinking won a Nobel Prize!?
Some “Yankee-Centric” Gold Myths
The U.S. press naturally quotes American sources more than foreign gold experts. As a result, much of their reporting gives undue weight to what various U.S. experts – who don’t understand gold – are saying.
Myth #6: Gold is Down 30% from its Peak. The dollar is up lately, in terms of many other currencies, in part because these other currencies are falling faster than the dollar. Most central banks are “easing” with a vengeance, so today’s currency wars represent a “race to the bottom,” to gain trade advantages.
In currency markets, as in physics, all things are relative. In particular, the Japanese government is now inflating the yen far faster than we are inflating the U.S. dollar, so gold has actually risen over the last year, in yen terms. In fact, gold set a new all-time high in terms of the Japanese yen earlier this year.
|Currency||Gold’s Price on
April 23, 2012
|Gold’s Price on
April 23, 2013
Source: Kitco.com for gold prices; Yahoo Finance for currency values
Gold has also risen in the last year in terms of South Africa’s rand and Argentina’s peso, while gold has fallen slower in terms of the Brazilian real, Swiss franc and euro than it has in terms of the U.S. dollar.
Myth #7: Investors Have “Lost Faith” in Gold: In the April 5 edition of The Wall Street Journal, an article headlined “Golden Moment Wanes for Investors” quoted bears on Wall Street, saying “Thursday’s fall was the latest evidence that investors have lost in faith in gold.” The article discussed changes in ETF demand, while ignoring the soaring physical demand for gold. The U.S. Mint says that 292,500 ounces of American Gold Eagles were sold in the first quarter, up 39% from 2012’s first quarter. Silver sales were up even faster, despite long delays in manufacturing and delivery of silver coins, due to rising demand.
Last week, on Tuesday, April 16 (the day gold reached its bottom price of $1321), sales of American Gold Eagle coins hit 33,000 ounces, plus 2,500 ounces of American Gold Buffalo coins, the highest one-day total of the year. This level of physical demand is even more pronounced overseas. While gold ETF buyers can be trend-followers, buyers of the physical metal are bargain-hunting buy-and-hold investors.
Myth #8: George Soros Matters. When gold fell in mid-February, most headlines blamed the fact that some big-name hedge fund managers had sold their gold ETF shares in late 2012, according to filings with the SEC. In particular, the press cited Soros Fund Management cutting its holdings in the SPDR Gold Trust by 55% to 600,000 shares. Some other funds – like Moore Capital Management, Lone Pine Capital and Scout Capital Management – said they sold all of their SPDR Gold Trust shares in late 2012.
New York’s Masters of the Universe can, indeed, push gold prices up or down in the short term. On Friday, April 12, there seems to have been a concerted effort to push gold down through massive sales on the COMEX. In the longer term, however, it really doesn’t matter how the notoriously fickle, trend-following hedge fund managers feel about gold this quarter vs. last. North America only accounts for about 7% of global gold demand. Within that small sliver, New York hedge funds are a small fraction.
Last year, India bought 864.2 metric tons of gold and China added 776.1 metric tons, according to World Gold Council. China and India account for over half of gold demand. Emerging markets account for 74% in all. Europe adds another 15%, and most Eastern hemisphere gold investors are not short-term traders.
Some Common Complaints about Gold that Just Aren’t True
Myth #9: Good Economic News Hurts Gold. Recent headlines in The Wall Street Journal make it clear that the press is transfixed with the idea that gold rises on bad economic news and falls on good news: “Outbreak of Optimism Means a Fearful Time for Gold Bulls” says one typical headline. Their reasoning is that the Fed might end quantitative easing (QE) if we return to good times. However, gold now rises on global prosperity, when more folks can afford the luxury of gold jewelry or a more diversified portfolio.
Back in 2001, when the current gold bull market began, the poor (“emerging”) markets were responsible for only about 15% of global gold demand. By 2011, according to the World Gold Council (WGC), the emerging markets accounted for 74% of total gold demand. Much of gold’s rise comes from more riches in formerly-poor lands. The correlation between liquidity and gold trumps any correlation with inflation:
- Global liquidity in the year 2000 was $2.5 trillion and gold was $275 per ounce.
- Global liquidity today is over $10 trillion and gold is over $1400 per ounce.
Myth #10: Gold is a “Bubble.” If you Google “Gold” and “Bubble,” you get 124 million hits, more than three times as many as for Bond and Bubble. The “B” word was cast about casually in September, 2011, when gold peaked above $1920 per ounce, and it was revived lately, during gold’s sharpest fall.
Classic bubbles involve quick doublings and rapid 50% price declines, followed by many years, if not decades, of sideways motion. Think New York stocks in 1929, gold in 1979, Tokyo stocks in 1989 or NASDAQ in 1999. By contrast, gold didn’t see a rapid doubling or quick retracement. Pundits compare the recent gold collapse to 1980, but there is no comparison. Back then, gold tripled in seven months and fell 45% in two months. Silver fell nearly 80% in two months. This time around, gold grew gradually. It is now in a bear market or a bull market correction, but it does not fit the classic investment bubble mold.
Myth #11: Demand is down (measured by what?): Last month, the Associated Press newswire reported a 4% decline in gold demand in 2012. The first sentence of their report explained the headline: “Global gold sales slipped in 2012 for the first time in three years as the biggest central bank purchases in half a century weren’t able to offset a decline in demand from India….The World Gold Council said that 4,405.5 metric tons were sold in 2012, down 176.8 metric tons, or 4%, from 4,582.3 metric tons in 2011.”
If readers continued to the very next sentence, they would learn that “the value of gold sold last year rose to an all-time high of $236.4 billion because of the rising price for the yellow metal, which rose 6% to an average of $1,669 per ounce.” Nearly all businesses report their annual sales figures in terms of dollars, not by volume or weight of objects sold, so the headline was misleading. Gold sales rose 2% in 2012:
2011: 4582.3 metric tons = 147.32 million ounces @ $1571 per ounce = $231.4 billion in sales
2012: 4405.5 metric tons = 141.64 million ounces @ $1669 per ounce = $236.4 billion (+2.16%)
Myth #12: Gold Offers No Income … as opposed to 90-day Treasury bills, which yield 0.09%, or bank CDs yielding 0.15%! Gold competes with currencies, not stocks, so whenever interest rates are this low, gold is on an “even playing field” with paper money, giving gold the advantage, since it is so difficult, costly and time-consuming to mine an ounce of gold, while another $1 trillion a year is easily created by the U.S. Treasury, in cooperation with the quantitative easing policies of the bond-buying crew at the Fed. The Fed is committed to its zero-interest-rate-policy until at least 2015, so gold is free to continue rising for as long as it can compete on an even playing field with the world’s various forms for paper money.
Gary Alexander has followed the gold markets for over 45 years, writing his first article in response to the devaluation of the British pound in March, 1968. He was managing editor of Jim Blanchard’s Gold Newsletter from 1983 to 1989. In the 1980s, he co-authored three books on gold-related investments, including Jim Blanchard’s “Confessions of a Gold Bug,” and he has served as MC and moderated precious metals panels at the New Orleans Investment Conference for most of the past 30 years.