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The Worst Argument Against Gold We've Ever Heard

By: Ed Bugos

A note from Ed Bugos,

Kanada is a very unusual place.  Jeff was wise enough to escape from this Socialist paradise years ago but I have remained.  It is unusual because, due to nothing but pure luck, the nation is host to some of the world's largest reserves of almost every known commodity as well as gold, but the great majority of people in Kanada are socialist and therefore have no interest in or concept of why gold as money is such a valuable thing.

You see, when you are socialist, you don't want honest money.  In fact, it goes against socialism because there is just no way to pay for all the welfare schemes and other giant government apparatuses unless you continually debase the money to pay for it all as you slowly wring all of the wealth out of the entire system until, like in the USSR, it eventually collapses.

So when I saw this article from the establishmentarian national newspaper of Kanada, The Globe & Mail, called 'The Case Against Gold" it caught my eye.

I am always looking for good arguments by which to test my theories and opinions and so I delved right in.  A few moments later I was wiping tears of laughter from my eyes.  If this is "the case against gold" we're gonna be rich!

This is the kind of stuff that keeps me bullish on gold.  The whole article starts with this amusing pitch from a hedge fund guy who says he’s confused about currencies and central bankers but expects gold to be tomorrow’s flop.  Why?  According to him, today's fad is tomorrow's flop!  Wow, don't get so technical!  He'd be better off analyzing the hoola-hoop market, or the pet rock market, than the history and fundamentals behind why precious metals have retained their value for thousands of years!

More puzzling, it states he “is a lonely figure these days” because he is bearish on gold.

The article goes on to state, “In the middle of this market fever, it is easy to forget that gold still must obey the law of supply and demand – and that the underlying fundamentals are now looking distinctly negative for the metal’s long-term prospects.”

Market fever?  I must have missed something.  It doesn’t feel feverish to me.  As we pointed out in the January edition of The Dollar Vigilante, despite a $1,000 rise in the price of gold, gold stocks are still trading at the same level, vis-a-vis the price of gold, as they were in 2003!

If we were in the midst of a "market fever" you would think gold stocks would not be underperforming gold itself.  But, as they point out in the article, the reason gold stocks haven't gone up much while gold has is because gold stock investors don't believe the price of gold will stay at these levels.  Yes, that, or, there is still a definite lack of market fever to begin to propel these stocks higher.

But then it all gets cleared up when the author goes into what he believes represents the bad fundamentals:

“Unlike most commodities, gold isn’t consumed in high quantities. Industrial uses account for only about 10 per cent of total demand, which is why jewellery makers have traditionally provided most of the market for the metal.  However, global demand for gold jewellery has been in steady decline, replaced only by demand from fickle investors – a shift that could have a disastrous impact on the price of gold if those buyers turn squeamish.”

Is this it?  This is the case against gold?  Buyers might turn squeamish?

The true fundamentals are bullish.  What will get all those allegedly “fickle investors” to stop buying gold is renewed confidence in the reserve currencies.  Which politician has that as their top priority right now?  That’s right.  None of them (except Ron Paul).

The article goes on to state:

"Of course, gold is still in high demand. But the source of this demand is now investors, who have become gold’s biggest buyers for the first time in about 30 years. These buyers have no uses for gold, other than the hope of selling it to someone else at a higher price somewhere down the road."

The same can be said for any fiat currency, especially with real interest rates (the interest rate paid versus the real loss of purchasing power - not just the government stated CPI numbers) in the negatives.  In fact, with most world currencies offering a negative real interest rate holding gold is a much better alternative.  As for "the hope of selling it to someone else at a higher price", that may very well be the case, and will almost certainly be the case in terms of nominal dollars, but the main reason most people hold gold is as a store of value.  Something which it has done an amazing job of doing for millennia.  It is the free market's money.  Not money by government fiat and under the threat of force.

David Berman, the author of this seminal piece on the case against gold would have done well to just check back through the archives of The Globe & Mail to the last time gold actually was in a frenzy.  Here was the front page of The Globe and Mail on January 4, 1980.

That story lead off by describing how countless Canadians were calling in sick from work to stand in line just in the attempt to try to buy physical gold while in places such as England and France the frenzied buying was made even more "frantic by an absence of sellers."

When we begin seeing the signs of that occurring again then we may change our views about where we are at in this gold market move.  Until then, pay attention to people like David Berman and their cursory, uninformed analysis of the gold market at your own risk.

Regards,

Ed Bugos

TDV Senior Analyst

Posted Tuesday, January 11 2011