Over the weekend, Dian Chu proposed the "precious metals (and specifically silver) are a bubble" argument to a rather vociferous reaction from readers. Today, to keep the argument balanced, we present the counterpoint from Doug Casey: basically, there is no spoon...or bubble.
Submitted by Doug Casey of Casey Research
Debunking Anti-Gold Propaganda
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.
It pays to remain as objective as you
can be when analyzing any investment. People have a tendency to fall in
love with an asset class, usually because it’s treated them so well. We
saw that happen, most recently, with Internet stocks in the late ‘90s
and houses up to 2007. Investment bubbles are driven primarily by
emotion, although there's always some rationale for the emotion to latch
on to. Perversely, when it comes to investing, reason is recruited
mainly to provide cover for passion and preconception.
In the same
way, people tend to hate certain investments unreasonably, usually at
the bottom of a bear market, after they've lost a lot of money and
thinking about the asset means reliving the pain and loss. Love-and-hate
cycles occur for all investment classes.
But there’s only one
investment I can think of that many people either love or hate
reflexively, almost without regard to market performance: gold. And, to a
lesser degree, silver. It’s strange that these two metals provoke such
powerful psychological reactions – especially among people who dislike
them. Nobody has an instinctive hatred of iron, copper, aluminum or
cobalt. The reason, of course, is that the main use of gold has always
been as money. And people have strong feelings about money. Let’s spend a
moment looking at how gold’s fundamentals fit in with the psychology of
the current market.
What Gold Is – and Why It’s Hated
me first disclose that I’ve always been favorably inclined toward gold,
simply because I think money is a good thing. Not everyone feels that
way, however. Some, with a Platonic view, think that money and
commercial activity in general are degrading and beneath the “better”
sort of people – although they’re a little hazy about how mankind rose
above the level of living hand-to-mouth, grubbing for roots and berries.
Some think it’s “the root of all evil,” a view that reflects a certain
attitude toward the material world in general. Some (who have actually
read St. Paul) think it’s just the love of money that’s the root of all
evil. Some others see the utility of money but think it should be
controlled somehow – as if only the proper authorities knew how to
manage the dangerous substance.
From an economic viewpoint,
however, money is just a medium of exchange and a store of value.
Efforts to turn it into a political football invariably are a sign of a
hidden agenda or perhaps a psychological aberration. But, that said,
money does have a moral as well as an economic significance. And it’s
important to get that out in the open and have it understood. My view is
that money is a high moral good. It represents all the good things you
hope to have, do and provide in the future. In a manner of speaking,
it’s distilled life. That’s why it’s important to have a sound money,
one that isn’t subject to political manipulation.
centuries many things have been used as money, prominently including
cows, salt and seashells. Aristotle thought about this in the 4th
century BCE and arrived at the five characteristics of a good money:
- It should be durable (which is why, say, wheat isn’t a good money – it rots).
- It should be divisible (which is why artwork isn’t a good money – you can’t cut up the Mona Lisa for change).
- It should be convenient (which is why lead isn’t a good money – it just takes too much to be of value).
- It should be consistent (which is one reason why land can’t be money – each piece is different).
- And it should have value in itself (which is why paper money leads to trouble).
the 92 naturally occurring elements, gold (secondarily silver) has
proved the best money. It’s not magic or superstition, any more than it
is for iron to be best for building bridges and aluminum for building
Of course we do use paper as money today, but only
because it recently served as a receipt for actual money. Paper money
(currency) historically has a half-life that depends on a number of
factors. But it rarely lasts longer than the government that issues it.
Gold is the best money because it doesn’t need to be “faith-based” or
rely on a government.
There’s much more that can be said on this
topic, and it’s important to grasp the essentials in order to understand
the controversy about whether or not gold is in a bubble. But this
isn’t the place for an extended explanation.
Keep these things in
mind, though, as you listen to the current blather from talking heads
about where gold is going. 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.
Misinformation and Disinformation
Gold is expensive.
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
It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.
The smart money is long gone from gold.
is an interesting assertion that I find based on nothing at all. Who
really is the smart money? How do you really know that? And how do you
know exactly what they own (except for, usually, many months after the
fact) or what they plan on buying or selling? The fact is that very few
billionaires (John Paulson perhaps best known of them) have declared a
major position in the metal. Gold and gold stocks, as the following
chart shows, are only a tiny proportion of the financial world’s assets,
either absolutely or relative to where they've been in the past:
Gold is risky.
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
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.
Gold pays no interest.
is kind of true. But only in the sense that a $100 bill pays no
interest. You can get interest from anything that functions as money if
it is lent out. Interest is the time premium of money. You will not get
interest from either your $100 or from your gold unless you lend them to
someone. But both the dollars and the gold will earn interest if you
lend them out. The problem is that once you make a loan (even to a bank,
in the form of a savings account), you may not even get your principal
back, much less the interest.
Gold pays no dividends.
course it doesn’t. It also doesn't yield chocolate syrup. It’s a
ridiculous objection, because only corporations pay dividends. It’s like
expecting your Toyota in the driveway to pay a dividend, when only the
corporation in Japan can do so. But if you want dividends related to
gold, you can buy a successful gold mining stock.
Gold costs you insurance and storage.
is arguably true. But it’s really a sophistic misdirection to which
many people uncritically nod in agreement. You may very well want to
insure and professionally store your gold. Just as you might your
jewelry, your artwork and most valuable things you own. It’s even true
of the share certificates for stocks you may own. It’s true of the
assets in your mutual fund (where you pay for custody, plus a management
You can avoid the cost of insurance and storage by burying
gold in a safe place – something that’s not a practical option with most
other valuable assets. But maybe you really don’t want to store and
insure your gold, because the government may prove a greater threat than
any common thief. And if you pay storage and insurance, they’ll
definitely know how much you have and where it is.
Gold has no real use.
assertion stems from a lack of knowledge of basic chemistry as well as
economics. Yes, of course people have always liked gold for jewelry, and
that’s a genuine use. It’s also good for dentistry and micro-circuitry.
Owners of paper money, however, have found the stuff to be absolutely
worthless hundreds of times in many score of countries.
of fact, gold is useful because it is the most malleable, the most
ductile and the most corrosion resistant of all metals. That means it’s
finding new uses literally every day. It’s also the second most
conductive of heat and electricity, and the second most reflective
(after silver). Gold is a hi-tech metal for these reasons. It can do
things no other substance can and is part of the reason your computer
works so well.
But all these reasons are strictly secondary,
because gold’s main use has always been (and I’ll wager will be again)
as money. Money is its highest and best use, and it’s an extremely
The U.S. can, or will, sell its gold to pay its debt, depressing the market.
find this assertion completely unrealistic. The U.S. government reports
that it owns 265 million ounces of gold. Let’s say that’s worth about
$400 billion right now. I’m afraid that’s chicken feed in today’s world.
It’s only a quarter of this year’s federal deficit alone. It’s only
half of one year’s trade deficit. It represents only about 5% of the
dollars outside the U.S. The U.S. government may be the largest holder
of gold in the world, but it owns less than 5% of the approximately 6
billion ounces above ground.
From the ‘60s until about 2000, most
Western governments were selling gold from their treasuries, working on
the belief it was a “barbarous relic.” Since then, governments in the
advancing world – China, India, Russia and many other ex-socialist
states – have been buying massive quantities.
Why? Because their
main monetary asset is U.S. dollars, and they have come to realize those
dollars are the unbacked liability of a bankrupt government. They’re
becoming hot potatoes, Old Maid cards. But the dollars can be replaced
with what? Sovereign wealth funds are using them to buy resources and
industries, but those things aren’t money. And in the hands of
bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal
of gold buying from governments around the world over the next few
years. And it will be at much higher dollar prices.
High gold prices will bring on huge new production, which will depress its price.
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
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
You should have only a small amount of gold, for insurance.
argument is made by those who think gold is only going to be useful if
civilization breaks down, when it could be an asset of last resort. In
the meantime, they say, do something productive with your money…
is poor speculative theory. The intelligent investor allocates his
funds where it’s likely they’ll provide the best return, consistent with
the risk, liquidity and volatility profile he wants to maintain. There
are times when you should be greatly overweight in a single asset class –
sometimes stocks, sometimes bonds, sometimes real estate, sometimes
what-have-you. For the last 12 years, it’s been wise to be overweight in
gold. You always want some gold, simply because it’s cash in the most
basic form. But ten years from now, I suspect that will be a minimum.
Right now it’s a maximum. The idea of keeping a constant, but
insignificant, percentage in gold impresses me as poorly thought out.
Interest rates are at zero; gold will fall as they rise.
principle, as interest rates rise, people tend to prefer holding
currency deposits. So they tend to sell other assets, including gold, to
own interest-earning cash. But there are other factors at work. What if
the nominal interest rate is 20%, but the rate of currency depreciation
is 40%? Then the real interest rate is minus 20%. This is more or less
what happened in the late ‘70s, when both nominal rates and gold went up
together. Right now governments all over the world are suppressing
rates even while they’re greatly increasing the amount of money
outstanding; this will eventually (read: soon) result in both much
higher rates and a much higher general price level. At some point high
real rates will be a factor in ending the gold bull market, but that
time is many months or years in the future.
Gold sentiment is at an all-time high.
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., that 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.
Mining stocks are risky.
is absolutely true. In general, mining is a horrible business. It
requires gigantic fixed capital expense to build the mine, but only
after numerous, expensive and unpredictable permitting issues are
handled. Then the operation is immovable and subject to every political
risk imaginable, not infrequently including nationalization. Add in
continual and formidable technical issues of every description,
compounded by unpredictable fluctuations in the price of the end
product. Mining is a horrible business, and you’ll never find
Graham-Dodd investors buying mining stocks.
All these problems
(and many more that aren’t germane to this brief article), however, make
them excellent speculative vehicles from time to time.
Mineral exploration stocks are very, very risky.
is very, very true. There are thousands of little public companies, and
some are just a couple steps up from a prospector wandering around with
a mule. Others are fairly sophisticated, hi-tech operations.
Exploration companies are often classed with mining companies, but they
are actually very different animals. They aren’t so much running a
business as engaging in a very expensive and long-odds treasure hunt.
the bad news. The good news is that they are not only risky but
extraordinarily volatile. The most you can lose is 100%, but the market
cyclically goes up 10 to 1, with some stocks moving 1,000 to 1. That
kind of volatility can be your best friend. Speculating in these issues,
however, requires both expertise and a good sense of market timing. But
they’re likely to be at the epicenter of the gold bubble when it
arrives – even though few actually have any gold, except in their names.
Warren Buffett is a huge gold bear.
is true, but irrelevant – entirely apart from suffering from the
logical fallacy called “argument from authority.” But, nonetheless, when
the world’s most successful investor speaks, it’s worth listening.
Here's what Buffett recently said about gold in an interview with Ben
Stein, another goldphobe: "You could take all the gold that's ever been
mined, and it would fill a cube 67 feet in each direction. For what
that's worth at current gold prices, you could buy all – not some, all
– of the farmland in the United States. Plus, you could buy 10 Exxon
Mobils, plus have $1 trillion of walking-around money. Or you could have
a big cube of metal. Which would you take? Which is going to produce
I’ve long considered Buffett an idiot savant – a
genius at buying stocks but at nothing else. His statement is quite
accurate, but completely meaningless. The same could be said of the U.S.
dollar money supply – or even of the world inventory of steel and
copper. These things represent potential but are not businesses or
productive assets in themselves. Buffett is certainly not stupid, but
he’s a shameless and intellectually dishonest sophist. And although a
great investor, he’s neither an economist or someone who believes in
Gold is a religious statement.
since most religions have an otherworldly orientation, they’re at least
subtly (and often stridently) anti-gold. But it is true that some
promoters of gold seem to have an Elmer Gantry-like style. That,
however, can be said of True Believers in anything, whether or not the
belief itself has merit. In point of fact, I think it’s more true to say
goldphobes suffer from a kind of religious hysteria, fervently
believing in collectivism in general and the state in particular, with
no regard to counter-arguments. Someone who understands why gold is
money and why it is currently a good speculative vehicle is hardly
making a religious statement. More likely he’s taking a scientific
approach to economics and thinking for himself.
So Where Are We?
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.
My own view should be clear from the
responses I’ve given above. But let me clarify it a bit further.
Historically – actually just up until the decades after World War I,
when world governments started issuing paper currency with no relation
to gold – the metal was cash, and it was used as money everywhere, on a
daily basis. I believe that will again be the case in the fairly near
The question is: At what price will that occur, relative
to other things? It’s not just a question of picking a dollar price,
because the relative value of many things – houses, food, commodities,
labor – have been distorted by a very long period of currency inflation,
increased taxation and very burdensome regulation that started at the
beginning of the last depression. Especially with the fantastic leaps in
technology now being made and breathtaking advances that will soon
occur, it’s hard to be sure exactly how values will realign after the
Greater Depression ends. And we can’t know the exact manner in which it
will end. Especially when you factor in the rise of China and India.
guess? I’ll say the equivalent of about $5,000 an ounce of today’s
dollars. And I feel pretty good about that number, considering where we
are in the current gold bull market. Classic bull markets have three
stages. We’ve long since left the “Stealth” stage – when few people even
remembered gold existed, and those who did mocked the idea of owning
it. We’re about to leave the “Wall of Worry” stage, when people notice
it and the bulls and bears battle back and forth. I’ll conjecture that
within the next year we’ll enter the “Mania” stage – when everybody,
including governments, is buying gold, out of greed and fear. But also
out of prudence.
The policies of Bernanke and Obama – but also of
almost every other central bank and government in the world – are not
just wrong. These people are, perversely, doing just the opposite of
what should be done to cure the problems that have built up over
decades. One consequence of their actions will be to ignite numerous
other bubbles in various markets and countries. I expect the biggest
bubble will be in gold, and the wildest one in mining and exploration
When will I sell out of gold and gold stocks? Of course,
they don’t ring a bell at either the top or the bottom of the market.
But I expect to be a seller when there really is a bubble, a mania, in
all things gold-related. There’s a good chance that will coincide to
some degree with a real bottom in conventional stocks. I don’t know what
level that might be on the DJIA, but I’d think its average dividend
yield might then be in the 6 to 8% area.
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.