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Last weekend, in a segment titled Gold
Obsession & Ephemeral States of Mind NFTRH 330 talked about
a growing presence that seems to follow Martin Armstrong’s anti ?gold
promoters? theme. This theme seems to be ? coming as it does in a gold
bear market ? something of a promotion itself; just as the over-the-top
inflationist gold bug stuff was during the bull market.
Please understand, dear followers of Marty, I am not at
all calling him a promoter. He is the originator of ideas, thoughts and
analysis that while not all my cup of tea, is interesting enough that it is
linked at NFTRH.com and Biiwii.com. But behind this mindset that is solidifying in the public
consciousness, is a growing cadre of gold bugs ? some of whom benefited from
the notoriety lavished upon them by the likes of Mr. Gold, Jim Sinclair ?
that seems to be taking things over the top*, as always seems to happen with
humans and in markets. Every mental elastic band seems to stretch too
far.
In the above noted NFTRH 330 segment an article I wrote
in 2007, A Value Proposition, was referenced.
In re-reading it for the first time in years I was impressed with how the
?value? case for gold has not changed one bit in the last 7+ years. At
least in my interpretation of value, which has kept me personally at an even
pulse rate during the bear market and given NFTRH subscribers consistent perspective
through a difficult, but ultimately necessary and healthy phase for
gold. It felt refreshing to re-read it.
So, if the the article benefited me, its author, all
these years later, I thought it might be of benefit for other peoples?
perspective as well in this emotional time of gold obsession.
As a final note, I?ll just say that it sure is
interesting that today, in a wicked bear market, gold is nearly $500 an ounce
higher than it was when the article was written.
* I have done my share of gold bug critiques,
complete with the requisite incoming hate mail. But the point is that
the new thing going on now was nowhere to be found when it was unpopular to
take shots at the gold bug ?community?. Indeed, with the help of a
subscriber who stated ?enough already, we get it!? I came to realize that the
horse has been dead for a while.
A Value Proposition (November 3, 2007)
As the rot in Wall Street?s dark alleys works its way
from the inside out, from the seediest hedge funds? leveraged ?investment?
vehicles to Main Street’s financial institutions (pensions, 401K?s, savings,
etc.) gold has taken center stage, closing above $800 for the first time in
its still young bull market. Fear and anxiety are increasing as the US Dollar
falls further below serious long term support and in this environment, gold
is an emotional conduit through which growing fears of fiat monetary
instability pass. Picture a burning building with a limited number of exits
and a large crowd trying to pile through the door. Let?s call it a? oh I
don?t know? let?s call it a casino.
Gold is the object of many strange and varied
perceptions, perhaps because it is an ancient asset that has always stirred
basic human instincts for wealth, good fortune and even survival. But in
light of the perverted and multi-headed monster we call a financial system ?
with seemingly infinite instruments of ?profit? limited only by the
imagination of financial engineers ? perceptions toward gold have become
distorted, helped by an enabling Wall Street and mainstream financial media.
The main point to remember is that gold does nothing; it
just sits there and does not care about the crazy gyrations going on all
around it. But to understand and accept this, casino patrons must first
accept that the metrics they have been schooled in and the rules they have
been taught over the fiat decades to play by are not applicable. Filling the
void that this lack of understanding creates is a whole host of opinions,
many disparaging and/or dismissive. Others simply attempt to fit this ?asset
class? into conventional metrics. The inspiration for this missive was a
recent SeekingAlpha piece by Brad Zigler
called All That Glitters May Not Be So Golden. Mr. Zigler did not write a ?hatchet piece? on gold but what I
find interesting is his and many other financial media correspondents?
analysis of gold as a return (or lack thereof) instrument.
Gold pays no risk premium as it carries no default risk.
But in the world of financial media-fed perceptions that is a bad thing. No
return you say? No markup? No leverage? Who needs that?! Gold is about value
and nothing more in my opinion. That is why I refuse to get excited when its
fiat currency denominated price goes up and why I also remain at a normal
pulse rate when said ?price? declines sharply. I do agree that when trading
or investing in the gold miners (as I do) it is important to keep traditional
metrics in mind. But the miners are my casino of choice and I most certainly
do not see the gold miners as gold, a gold equivalent or anything other than
a potentially hugely leveraged play on an enduring asset of value.
Back in the real world, players are just beginning to get
the hint that the risk they have taken on in the hunt for return in some very
dark corners has come at a price and the price is a massive debit against the
entire system of something for leveraged nothing. Yes, gold pays no premium
but neither is it subject to this debit because it never went anywhere to
begin with. It Is What It Is and as a barometer of global financial sentiment
its exchange value is rising versus a whole host of paper promises not to mention
many hard assets. So what many investors now need is a sort of 12 step
program as they attempt to ?put down the crack pipe? and come to an
understanding that real value has nothing to do with return (unlike modern
portfolio and asset allocation theory) and it certainly has nothing to do
with leverage.
Mr. Zigler?s assertions and my responses:
Debate has raged for some time now about the utility
of gold in a portfolio. Forget, for a moment, the breathless claims of
infomercial touts and Parade magazine advertisers. Think, instead, of asset
class selection.
Why should anyone add gold?or, for that matter, any
asset?to a portfolio? The answer that comes immediately to many people?s
minds is ?return.? It?s the promise of outsized, and often outlandish, returns
that entices people to call that 800 number in the wee hours of the morning
to get their hands on the yellow metal.
There should be no debate. An asset of historic value
belongs in a portfolio if debt obligations (bonds) and calls on corporate
earnings (stocks) belong there. I agree, the 800 number pitch men are seedy
characters capitalizing on fear and insecurity, but why are they part of the
conversation? Have you ever seen the movie Boiler
Room? The world of stock scams dwarfs that of
unscrupulous precious metals dealers.
Gold isn?t the end-all, be-all, however. In the long
term, the metal?s price is notoriously unstable. Since gold?s price was
allowed to float in 1970, its annualized standard deviation?its price
variance?has been clocked at nearly 20 percent, versus 15 percent for
blue-chip stocks. And in that time, gold?s return has only averaged 8
percent. The S&P 500 earned 11 percent per year.
There is the word ?return? again. The reason gold has
under-performed over the measured time frame (minuscule in the context of
history) is because contrary to what some gold bugs may think, there
certainly was upside to the fiat money system. This upside was manifested in
liquidity to build out all manner of productive enterprise. The United States
for example spent the majority of the 20th century on the upside of this
build-out. The question now becomes ?do we remain on the upside or have the
secular changes beginning in and around 2000 marked a decided switch to the
inevitable payment to the piper (of the debt used to keep the dream alive)??
If you think there is still productive upside, you will see gold?s ?return?
as sub-par. If you believe that secular changes are at hand, you are looking
for that exit door in a crowded casino and you don?t give a damn about
return. You want to stay whole.
So what return can we expect from gold? Well,
financial theory says you can?t expect any increase in an asset?s value without
growth prospects. Stocks? expected return derives from earnings growth.
Issuers of corporate securities can create things and grow. There?s a real
prospect for a company trading its shares or warrants to be worth more and
more as the result of management decisions. Gold itself doesn?t produce
earnings, and for that reason its expected return can be approximated as
zilch. Nada. Bupkis.
Mr. Zigler is correct. Gold provides no ?return? in the
modern asset allocation theory sense of the word. But in bringing the word
?value? into the equation he again shows how modern portfolio theorists are
trained; no return, no ?growth? = no value proposition. Gold does not stand
at $806 this morning because of its growth but rather because of its retained
value vs. paper instruments ? USD first and foremost ? which are coming under
heavy questioning. It should be noted that in the US the stocks of these
growth entities are denominated in USD.
Appreciation in the price of gold, of course, does
occur. History attests to that. There?s just no reason to expect it. What
influences the price of gold are external, not intrinsic, forces.
It appears Mr. Zigler and I have been watching two
different financial systems over the last several years but I certainly agree
that gold?s value is affected by external forces.
He then goes on to write about the gold miners which is
my usual subject matter on the TA Blog [edit; much less so now, as too
many patrons micro manage every squiggle in this sector publicly and NFTRH
reserves most of its gold stock analysis for subscribers], so I will
just end here this critique of modern portfolio theory as it applies to gold.
I hope it helps shed a little light on an alternate way of thinking for a few
people.
I will leave you with a final thought that I was taught
early on in a school of decidedly unconventional asset theory. Price is price
and value is value. They are not one in the same. Unfortunately that simple
thought has been schooled out of the masses. I have no doubt that pitchmen of
all types will come out of the woodwork to hawk the golden solution to an
awakening public. A fortunate few will keep it simple however and remember
that real value is enduring and real value is not a pitch. I find value
splitting wood at my wood pile. I find value in jamming loudly on guitar. I
find value in Google. I find value in the air I breathe. I find value in
remaining financially whole. I do not find value in debits attached to an
unpayable black hole.
Biiwii.com
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