By Doug Casey
Chairman, Casey Research
Monday, April 18, 2011
A meme is now circulating that gold is in a bubble and that it’s time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one.
As you listen to the current blather from talking heads about where gold is going, keep in mind most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations.
You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.
So let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.
“Gold is expensive.”
This objection is worth considering – for any asset. In fact, it’s critical. We can determine the price of almost anything fairly easily today, but figuring out its value is as hard as it’s ever been. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 – but that official number is meaningless, since nobody buys or sells the metal at that price.
(More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.)
Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold.
Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence. It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.
“Gold is risky.”
Risk is largely a function of price. And as a general rule, the higher the price, the higher the risk, simply because the supply is likely to go up and the demand to go down – leading to a lower price. So yes, gold is riskier now, at $1,400, than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.
In any event, risk is relative. Stocks are very risky today. Bonds are ultra risky. Real estate is in an ongoing bear market. And the dollar is on its way to reaching its intrinsic value.
Yes, gold is risky at $1,400. But it is actually less risky than most alternatives.
“High gold prices will bring on huge new production, which will depress its price.”
This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 82.6 million ounces per year and has been trending slightly down for the last decade. That’s partly because at high prices, miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production.
But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper. Its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things – new production is a trivial influence.
That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold. Space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists’ dream. Perhaps someday this will be economic for gold. And nanotech may soon allow ultra-low-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters in the course of this bull market.
“Gold sentiment is at an all-time high.”
Although gold prices are at an all-time high in nominal terms, they are still nowhere near their highs in real terms – of about $2,500 (depending on how much credibility you give the government’s CPI numbers) – reached in 1980. Gold sentiment is still quite subdued among the public. Most of them barely know it even exists.
Some journalists like to point out that since there are a few (five, perhaps) gold dispensing machines in the world, including one in the U.S., there’s a gold mania afoot. That’s ridiculous, although it shows a slowly awakening interest among people with assets.
Journalists also point to the numerous ads on late-night TV offering to buy old gold jewelry (generally at around a 50% discount from its metal value) as a sign of a gold bubble. But this is even more ridiculous, since the ads are inducing the unsophisticated, cash-strapped booboisie to sell the metal, not buy it.
You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point.
These are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools, or the uninformed.
The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they’re done, I suggest you be right and sit tight.
Editor’s note: Doug Casey, chairman of Casey Research, is a best – selling author, international investor, and entrepreneur. He travels the world looking for the best real estate and natural resource investments. His work is required reading here at DailyWealth.
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