{"id":23262,"date":"2011-08-17T10:11:09","date_gmt":"2011-08-17T14:11:09","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=23262"},"modified":"2011-08-17T10:11:09","modified_gmt":"2011-08-17T14:11:09","slug":"return-of-the-gold-bubble-monsters","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/08\/17\/return-of-the-gold-bubble-monsters\/","title":{"rendered":"Return of the Gold Bubble Monsters"},"content":{"rendered":"

By Kris Sayce<\/strong><\/abbr><\/p>\n

\u201cWe believe that we have reached the point where we can confidently state that interest in gold investing has reached the level of a speculative bubble. Prudent investors should be very wary of having substantial investment exposure to this precious metal in their portfolios.\u201d<\/em> \u2013 \u2018The Gold Bubble\u2019<\/a><\/em>, Wells Fargo, August 2011<\/p><\/blockquote>\n

You can read the full six-page report by clicking the link above.<\/p>\n

As you know, we always encourage investors to be prudent. That may seem strange coming from a guy who tips speculative small-cap stocks.<\/p>\n

But that\u2019s why we always tell our Australian Small-Cap Investigator<\/a><\/em> subscribers to only invest what they can afford to lose.<\/p>\n

Punting on small-cap stocks is highly speculative. But it can also be highly rewarding. And when the market goes your way, it\u2019s lots of fun too.<\/p>\n

But, as we see it, gold is none of those things. We\u2019ll explain why in a moment. But before we do, just remember your editor has a gold bias. We have a big chunk of our wealth tied up in the stuff.<\/p>\n

7 Reasons to sell gold<\/strong><\/p>\n

Right. Let\u2019s get down to brass tacks. Why does Wells Fargo put gold in \u201cspeculative bubble\u201d<\/em> territory?<\/p>\n

It gives seven reasons. They are:<\/p>\n

    \n
  1. Volatile price movements<\/li>\n
  2. No income<\/li>\n
  3. Greater fool dependence<\/li>\n
  4. Central bank activity<\/li>\n
  5. Inflation fighting properties are overstated<\/li>\n
  6. Warren Buffett\u2019s view on gold values (By the way, Warren Buffett\u2019s firm happens to be the largest shareholder in Wells Fargo)<\/li>\n
  7. And\u2026 wait for it\u2026 [adjusts collar and coughs]<\/em> \u201cYou can\u2019t eat gold\u201d<\/em>!<\/li>\n<\/ol>\n

    Actually you can. We once saw someone do it on a cooking show. It was a very thin gold leaf.<\/p>\n

    And Goldschl\u00e4ger \u2013 Swiss cinnamon schnapps \u2013 <\/strong>has gold flakes in it. So bottoms up to that!<\/p>\n

    That aside, we don\u2019t get why the anti-gold brigade always uses the inedibility of gold as a reason not to own it. It\u2019s just silly. But Wells Fargo goes further:<\/p>\n

    \u201cGold doesn\u2019t readily produce cash flow, doesn\u2019t provide shelter, can\u2019t be eaten, nor does it provide efficient clothing.\u201d<\/em><\/p><\/blockquote>\n

    Er, OK. But there\u2019s a million-and-one other things that applies to.<\/p>\n

    Such as, Google shares \u2013 or any other non-dividend paying growth stock. It doesn\u2019t pay a dividend\u2026 you can\u2019t shelter in a Google share\u2026 you can\u2019t eat a Google share\u2026 and nor can you turn a Google share into a nice frock.<\/p>\n

    Or what about a 10-dollar note in your wallet? It doesn\u2019t produce cash flow, you can\u2019t live in it, you can\u2019t eat it (we\u2019ve never seen a plastic-coated banknote used by any celebrity chef in a recipe), and it isn\u2019t the latest in wearable fashion.<\/p>\n

    Yet that doesn\u2019t mean cash isn\u2019t useful. And it doesn\u2019t mean you should never buy shares in growth stocks\u2026 even though [darn it]<\/em> you can\u2019t eat, dwell in or wear the things.<\/p>\n

    But Wells Fargo\u2019s anti-gold rant is fine by us. It makes us even more convinced gold isn\u2019t in a bubble (remember our bias though).<\/p>\n

    Spot the bubble \u2013 gold or stocks?<\/strong><\/p>\n

    Although we\u2019ll give them some advice. Next time they try to prove gold is in bubble territory, they shouldn\u2019t produce a chart that shows\u2026 the opposite.<\/p>\n

    To back their argument that gold is a poor hedge against inflation, the Wells Fargo team used the following chart:<\/p>\n

    \"\"<\/a><\/p>\n

    The chart shows since 1985, U.S. stocks are up 500%. Compared to a measly 100% gain for gold. Both are returns after inflation.<\/p>\n

    Which got us thinking: if gold is a \u201cspeculative bubble\u201d<\/em> after a 100% inflation-adjusted gain over 26 years, what does that tell you about stock prices which are up over 500%?<\/p>\n

    Look, Wells Fargo has fallen into a classic trap. First, it shows they don\u2019t understand gold. And second, they\u2019re comparing returns of two completely different asset classes.<\/p>\n

    Price rises alone can\u2019t be used to prove a bubble. Just because stocks are up 500% doesn\u2019t mean they\u2019re in a bubble any more than gold being up 100% means it\u2019s in a bubble.<\/p>\n

    Put another way, it\u2019s not the comparative price rise that\u2019s important; it\u2019s the reason behind the price rise that counts.<\/p>\n

    As we see it, gold is<\/em> a prudent investment. Sure, it can be volatile. As Wells Fargo points out:<\/p>\n

    \u201c[D]uring six short months in 2008, gold lost more than 30 percent of its value. In the 1980s, in a little more than two years, the price of gold dropped approximately 65 percent.\u201d<\/em><\/p>\n

    Excuse us for a moment while we glance at the above chart again\u2026 what do we see? That\u2019s right. Huge share price volatility. And if we remember rightly, in six short months in 2008, the stock market lost more than 30 percent of its value too.<\/p>\n

    But that\u2019s fine. Stocks are supposed to go up and down. And so is gold. Both will find and lose favour at different times.<\/p>\n

    The important thing to remember is that by itself, gold isn\u2019t volatile. As Wells Fargo points out, gold doesn\u2019t do anything\u2026 it\u2019s just there. So how can something inanimate be volatile?<\/p>\n

    One single reason to buy gold<\/strong><\/p>\n

    The answer is political. Central bank interference creates volatility. And that\u2019s reflected in the gold price.<\/p>\n

    The chart below shows this perfectly:<\/p>\n

    \"\"<\/a><\/p>\n

    While currencies were fixed to a set weight of gold or silver, the price was stable. That was mostly the case (although not entirely) until the early 1970s.<\/p>\n

    But as soon as gold backing of currencies stopped, paper or electronic money could grow without limit. That resulted in the gold price taking off.<\/p>\n

    In other words, it\u2019s not that the gold price has risen to a speculative bubble, but rather paper money has been devalued into the ground. Remove the interference and you\u2019ll remove the volatility in the price of money and gold.<\/p>\n

    But the one reason why we buy gold \u2013 because the interference won\u2019t go away.<\/p>\n

    Granted, we don\u2019t have seven reasons to counter Wells Fargo\u2019s argument. But like Jason Segel in the movie Bad Teacher<\/a><\/em>, we don\u2019t need seven reasons. Because the one argument we have is \u201cthe only argument we need Shawn!\u201d<\/em><\/p>\n

    The upshot is: if you think central bankers will stop devaluing paper money then sure, go ahead, sell your gold \u2013 or don\u2019t buy it if you don\u2019t own any.<\/p>\n

    But if, like your editor, you believe central bankers can\u2019t help themselves and will keep inflating for as long as they can, well, our message is ignore the gold bubble rubbish and keep prudently buying gold whenever you can.<\/p>\n

    Cheers.<\/p>\n

    Kris Sayce<\/strong>
    \nMoney Morning Australia <\/em><\/p>\n

    Original Article: Return of the Gold Bubble Monsters<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Right. Let\u2019s get down to brass tacks. Why does Wells Fargo put gold in \u201cspeculative bubble\u201d territory? It gives seven reasons…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-23262","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23262","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=23262"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23262\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=23262"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=23262"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=23262"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}