Gold is not glittering

Posted by on Sep 8, 2014

A number of fine economic reports over the week helped the Dow get to within about 30 points of setting a new all-time high on Friday, with the S&P500 actual establishing another new all-time mark. The August jobs report was below expectations. However, since the last two Augusts have had their respective initial jobs data revised higher, I suggest that’s one reason why the market just kind of yawned with the release of the news.

One other market point was that Adam Parker, chief US market strategist at Morgan Stanley, who has been a major bear for seemingly ever, last week rather significantly changed his tune and came to the light side. He said, “We believe a prolonged period of deleveraging in the US, coupled with an uneven global recovery, are just two of the reasons why this could prove to be the longest US expansion – ever.” He added that, our economy “may continue growing for five years or more, making it the longest period of expansion.” His upside target for the S&P is 3000.

Why am I writing about gold now?

I read last week that this past Saturday, the 6th, was the third anniversary of gold having hit its all-time (nominal) intraday high of over $1,920/oz. Nominal means it was the highest actual number it ever traded at. However, if you go back to January, 1980, when it hit its all-time high and adjust for inflation, that number is more like $2,300. So, no matter how you cut it, it’s down a bunch since that time…around a third, if my math is right.

People – using the always deadly rear view mirror approach to investing – point out how well gold did in the middle part of the last decade. And because of that logic, it’s a source of ongoing amazement to me that people actually continue to put good money into gold today. Their reasons they give can be most interesting but usually lack much sense of economics or positive attitudes about the economy or life in general.

Okay, some of them bought the stuff because “everyone knew” that the easing being done by the Fed would cause inflation to rocket and the only way to “safety” was with gold. Well, you’ve seen that that’s not happened. Sure, it could at some point, I guess, but why lose money continuously while you wait?

Since I was present for that real, adjusted all-time high for gold, I have a really hard time ever thinking it’s a good investment. Just from the math point, think of it this way. The yellow stuff, in addition to being dividend and interest rate free, has never had a real, long-term profit since 1980. Sure – IF you sold, and very few did or have – there were profits to be made as a trader but otherwise, all you’ve got is some shiny, expensive door stops.

Goldman says…

Jeffrey Currie is head of commodities research at Goldman Sachs. On Thursday, he said the Ukraine-Russia crisis and economic weakness in Europe and Japan have been supporting gold somewhat, but “prices are being pressured by Federal Reserve policy.” That’s why he sees the precious metal falling 17 percent from current levels by year end.

He went on to say, “Our target at the end of this year is $1,050, really driven by the view that we think that the Fed will ultimately be the dominate force here and put more downward pressure [on prices]. Gold is a hedge against a debasement in the US dollar.” However, with the weakness in Europe and Japan, we’ve seen the US Dollar Index, which compares the dollar to a basket of other currencies that most prominently includes the euro, has instead surged over the past few months. Since gold and other commodities are denominated in US dollars, a stronger dollar tends to crush gold.

The point about the Fed putting downward pressure on prices is that, as rates rise, this tends to make the dollar stronger. And with rates at the lowest in over 30 years, it seems likely that those rates – responding to the stronger economy and demand for funds increasing – will be rising for the foreseeable future.


Gold may indeed go up in a knee-jerk response when scary situations crop up around the globe. It’s best to understand that those gold prices are responding to the action in the stock market, not to the conflicts themselves.

We saw gold prices start to outperform commodity prices beginning in 2009. However, I think you can definitely say it’s been correcting that in recent years. Once Miz Yellen and her crew decide to let interest rates start to rise, gold will definitely come under more and more pressure. I think a lot of gold bugs (those for whom gold is their primary focus) got used to a couple years of pretty easy times.

Consider that, if you are truly concerned about inflation being a big problem when the Fed backs off their program, there are many other good, solid investments, backed by real assets, which can provide you a similar level of asset protection and give you liquidity, as well as some cash flow from dividends while you hold it.

Gold did have a good run. That’s well over. Given the big picture, US economic outlook, there surely doesn’t seem to be any logical reason to be buying gold.

On the other hand, there are a multitude of reasons to sell and place those non-performing assets into those which can actually help grow the value of your holdings.




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