Why Faith In Gold? (One Simple Statistic)

Tyler Durden's picture

Submitted by Tim Price via Sovereign Man blog,

On December 31st, 1964, the Dow Jones Industrial Average stood at 874. On December 31st, 1981, it stood at 875. In Buffett’s words, “I’m known as a long term investor and a patient guy, but that is not my idea of a big move.”

To see in stark black and white how the US stock market could spend 17 years going nowhere– even when the GDP of the US rose by 370% and Fortune 500 company sales went up by a factor of six times during the same period– the price chart for the Dow is shown below.

 

20140106 tim price rates1 Why do we have faith in gold? (one simple statistic)

So the US stock market suffered a Japan-style lost decade, and then some. Back to Buffett, again:

“To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates.

 

“These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities.

 

“So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.

 

“In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities.

 

“So there–in that tripling of the gravitational pull of interest rates- -lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.”

So how you feel about asset allocation this year should largely be a function of how you feel about interest rates.

And if you fear that interest rates are more likely to rise– triggered, perhaps, by a combination of Fed tapering and general weariness / revulsion at the manipulation of so many financial assets– then you should perhaps question your commitment to western equity markets as well as to bonds.

As Buffett wrote in a 1999 article in Fortune magazine, “Secular equity bull markets occur when long-term rates are dropping… and secular bears occur when rates are rising.” This is hardly rocket science.

Of course, 2014 could be yet another year in which equity markets rise further, driven by hopes and expectations of still more QE. But that’s not a bet we’re entirely comfortable making.

Since we’re primarily attracted by valuations and not by momentum, we’re now fishing for equities in a clearly demarcated pool (Asia and Japan– because that’s where values are most compelling).

We are not interested in most western markets because the value isn’t visible to us and the underlying growth (fundamentals, anybody?) looks pathetic.

And our monetary authorities have showered financial markets with kerosene by ensuring that the conventional ‘risk-free’ alternative to equities (i.e. government debt) is anything but.

Yet our exposure to ‘alternative’ assets, primarily precious metals, proved variously problematic last year.

2013 was the year that the mainstream financial media went aggressively anti-gold, and in his magisterial (and deeply witty) 2013 Year In Review, Cornell chemistry professor and economic agent provocateur David Collum cites three pertinent quotations from the New York Times:

“There is simply nothing in the economic picture today to cause a rush into gold. The technical damage caused by the decline is enormous and it cannot be erased quickly. Avoid gold and gold stocks”;

 

“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels”;

 

“The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”

But as Collum also points out, these quotes are from 1976, when the spot price of gold fell from $200 to $100 an ounce. Thereafter, gold rose from $100 to $850.

Why do we continue to keep the faith with gold (and silver)? We can encapsulate the argument in one statistic.

Last year, the US Federal Reserve enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed’s balance sheet had grown to $800 billion.

Under its current QE programme (which may or may not get tapered according to the Fed’s current intentions), the Fed is printing $1 trillion a year.

To put it another way, the Fed is printing roughly 100 years’ worth of money every 12 months. (Now that’s inflation.)

Conjuring up a similar amount of gold from thin air is not so easy.

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Stuart's picture

Whoever is using the paper market to drive down prices so they can clean physical off the shelves agrees with you. 

Kaiser Sousa's picture

BREAKING NEWS!!!!

guesss who figured out the action in Gold and Silver today...

http://www.cnbc.com/id/101313154

Pladizow's picture

Between '64' and '81', Wall St couldnt do whatever the fuck it wanted!

Osmium's picture

True.  And when did Wall Street hatch the 401k idea to steal more money from more people?  1979 - 1980 I think

Papasmurf's picture

Remember when Bush pushed to privitize social security?

philipat's picture

And I also remember that, in those days, Banks were actually honest and trustworthy institutions. Bank Managers were pillars of society. How much things have changed as a result of American exceptionalism??

nope-1004's picture

LMFAO.... "not sure if it was a big fund or what that caused prices to fall...."

 

IDIOT statement, read by an IDIOT reporter, paid to read the IDIOT teleprompter.

 

DoChenRollingBearing's picture

 

 

LOL!

I wonder what CNBS would say if/when FOFOA's $55,000 comes true...  Would that lead to anyone getting fired?

 

 

no...

stacking12321's picture

why would they fire someone for doing what they are ordered to do?

only thing that will happen is cnbs will lose credibility, but, i would say they don't have much to begin with.

 

Ignatius's picture

Gold manipulation is like the 'revelations' of domestic spying:  they want us to know.

Herd Redirection Committee's picture

Bugs Bunny (when we were kids_) preached defeatism: "If you can't beat 'em, join'em"

These days we have experts tell us "Don't fight the Fed"

Soul Glow's picture

Mom and Pop investors have the memory of radiated tuna fish.  Only 6 years ago did they see one of the greatest wealth transfers ever occur - away from them and into the hands of the banks - and yet nowhere more so than the USA can we see faith being put back into stocks as every retail investor rushes back in the stock market.

Many of these people were the same ones who got taken in 2001, the early '90s, and '87.  These are of the Boomer class, an entilted egotistical generation far more interested in being right in the past than being right in the future.  This generation thinks they stopped the war in Vietnam although that war was lost when Saigon fell.  The Boomer generation thinks of themselves as the first feminists yet support a POTUS who was/is more womanizing than Hugh Hefner.  The Boomer generation repeats mistake after mistake and have followed WS off of a cliff.  

But now the chickens come home to roost, and with no meal stored.  Their faith is back in the stock market and they will get plucked and skinned ike never before.  Coo-coo-cachoo, Boomers.

Buzz Hacksaw's picture

I've watched these pick pocket events you speak of. I've said for years "Set 'em up to knock 'em down".

All those boomers cam't possibly fit in that little car.

 

therover's picture

For me it's if you can't beat em, CHEAT em.

Jack Napier's picture

Taking a line from Letterman's Top 10... drumroll please!

If you can't beat em...

10) You don't deserve to win.
9) Try harder.
8) Beat them, literally.
7) Redesign your game plan.
6) Make up your own rules.
5) Stop giving a shit about the rat race and live your life.
4) Call an impromptu meeting with Sailor Jerry.
3) Be your own central bank! Gold+Silver=Winning
2) It's worth saying again, beat them, literally!
1) Don't play their game!!

swmnguy's picture

Quite so.  The aticipated effect on our behavior of all of us knowing this stuff is their goal.  The behavior effect is far more wide-ranging than the direct results of the actions.

ForWhomTheTollBuilds's picture

It certainly would have a chilling (in the west) psych ops effect wouldn't it?

 

2010:  "Silly gold bugs see all sorts of shadow men moving the price about because they aren't very knowlegable about how markets work and fill in the blanks with their overactive imaginations."

2013:  "Stand the fuck back, because we are gonna jam it so far down, your friends will call just to see how you are. We OWN this system, the markets and the regulators so we can do you anything we want.  Any sized cramdown any size market corner goes because we say it does.  And this is just the shit you can see.  We have 1000 to 1 leverage in the derivatives markets which don't even have a pretense of regulation.  Do you understand what that means you monetary boyscouts?  You have no idea what you are up against."

 

My only consolation is that the public seems to own almost no gold so if it hits an FOFOA type price, people will maybe look at it like bitcoin going up to $1000 rather than gold holders having committed some crime against them.

swmnguy's picture

From the story you linked:

"Logic events are not out of the ordinary for electronic markets," CME Group spokesperson Damon Leavell wrote to CNBC.com. "All trades stand and our technology performed as designed."

That just sounds funny, doesn't it.  Funny-peculiar, not funny-haha.

I Drink Your Milkshake's picture

Looks like they read that Oct '13 IMF report too.

http://www.cnbc.com/id/101307602

 

Rainman's picture

The Chinese have been talking about USSA gold price smackdowns for some time.

http://www.gata.org/node/13446

DoChenRollingBearing's picture

+ 12

Gold is forever, or at least for your children, grandchildren...

Skateboarder's picture

I gave one of my best friends his first oz of silver yesterday to jumpstart his collection. He had not considered buying PMs before, but when he saw real money for the first time, he was a 'convert' immediately. :)

DoChenRollingBearing's picture

 

 

+ 1 for spreading it around.  FOFOA sez that the more de-centralized the gold is held, the better (silver counts in my book).

But, I had NO SUCH LUCK giving away 1/10th oz gold coins to a couple of nieces and nephews...  You either get it, or you do not.  I am done with preaching to heathen (non-PM holders).

Temporalist's picture

DCRB the impact of a big coin, like 1oz of silver, in a child's hand is what you need to look for.  You could even go for a 2oz or larger silver coin to match the 1/10th.oz of gold but still kids like how big and heavy a silver coin is...a 1/10th oz gold coin is just not impressive if they don't know the value.

bwh1214's picture

Telling isn't it. I think people can actually tell when things are over or undervalued compared to one another, kid or adult. I think people can tell when holding the same dollar amounts of silver and gold which one they want. And your right instead of giving the kids a 1/10 oz coin, give them a 5 oz ATB quater, they will love it I promise.

franzpick's picture

"when he saw real money for the first time"

Ron Paul asked Bernanke 'is gold money'?, to which bernie answered "No".

But Paul asked it the wrong way: had he asked "In India, is gold money?", Bernie would have had to spit out the word Yes...

hunglow's picture

I have never been to India.  We are not in India but I think I would like to ride on top the trains, I think.

Papasmurf's picture

I remember as a boy, getting my first laminated quarter and knowing the value was gone.

WmMcK's picture

Absolutely agree.  The 1.5 oz Canadian Polar Bears make great gifts for kids. 

MeelionDollerBogus's picture

indeed. Some may shudder but I let my silver & gold, all coins & bars, be played with by toddlers. the whole stack.
I know, age 2 and 4 and you'd think "oh no, snot all over my maples!!"
Yes, I know.
But those children will never, EVER forget what real money is. Ever.
It's something now clearly understood. The weight, the sound, how shiney it is & they did listen a little about the difference of paper and gold (and silver).
They were girls too. So when I explained at the time how many barbie dolls you can get with just ONE gold wafer (1 oz) their eyes lit up.
They got it.

Skateboarder's picture

The more affinity one has to digital money (it is very high in Gen-Y/Millenials), the harder it is to accept that 'something silly like an ounce of gold' can cost 1200 dollars or something like that. "Dude, that's, like, half a pound of weeeed maaaan."

Luckily my amigo already long held the belief that cash is king and digital money is worthless when the power goes out.

Spungo's picture

omg billion dollar idea. Let's make a weed backed currency called Weedcoin.

LoneStarHog's picture

Weedcoin? ...It is sure to go up in smoke.

ParkAveFlasher's picture

The Germans did try - among other things - a grain-backed currency in the Weimar Republic.  They also did a mortgage-backed mark.  There is nothing new under the sun, besides tomahawk missiles, and a price-control regime that automatically taps all phones, tracks all citizens via GPS-enabled phones or predictive analysis, and records video from all enabled devices that memorizes undisguisable physical characteristics, and simultaneously produces predictive algorithms to deduce possible network affiliations between citizens that might join together in government opposition or at least defection from the price control cartel. 

I'd say we are in new territory there, with tomahawk missiles and the omniscient state.

Tall Tom's picture

Weedcoin...Now that is a good idea. Hell it can even have a Commodity Futures Market based in Washington State and Colorado. There will always be a demand.

 

Good idea.

The Wisp's picture

when you give gold as a Gift ( i have ) you always  use the Line.. if you ever decide to sell it, I would like first Shot

therover's picture

+1 and then some. I have been doing the same thing, and have converted several. It's easier with silver due to the price, but soon enough 10 gram gold bars and 1/4 ounce gold coins start to get bought by the converted too. Then the bigger stuff. One of my friends got his first 1 ounce gold eagle last week.

Only a matter of time.

MeelionDollerBogus's picture

saw the same thing at work years ago.
I brought in one of my gold ounce wafers & took it right out of the case & put it in his hand.
He was a doubter until then but the look in his eyes, the feel of the weight, the purity, you could see it.
No one can hold that in their hands and pretend it's not money. The illusion is destroyed on contact.

fockewulf190's picture

Picked up more phyzz over the weekend.  Happy everytime I can trade pieces of paper for solid hard assets.  I´m pretty much counting on having to burn through a good portion of my stack in order to get through the Great Reset, so I doubt there will be much left for any beneficiaries...especially since no western government has any idea of what to do when the derivatives time bomb blows the entire worlds economic system apart.  I´m expecting draconian this and Mad Max that, mixed with terrible suffering for billions.  I really hope I´m wrong, but seeing that Obama is out playing more golf than ever, I´m going to keep stacking.

TheGardener's picture

Gold is a daring bet.

Like a return to a gold standard.

Like a return to morals and such.

Like a return to monarchy.

Spungo's picture

Don't let rose color glasses fool you about the gold standard. The gold standard had a lot of problems. Being tied to hard assets can cause financial gridlock during periods of recession. Fiat currency is far superior as long as inflation is kept low. The reason the US dollar is dying is because the government and fed refuse to admit there is inflation. In the 1970's, the calculation for inflation included housing prices. Houses going up 10-20% per year was a sign of extremely high inflation. Since about 1980, they've stopped including house prices and only look at rent prices. This hides a huge amount of inflation. They're also ignoring all of the inflation in the stock market.

donsluck's picture

"as long as inflation is kept low" now there is the rub. It is the reason fiat always fails, and gold/silver has survived as money for thousands of years.

fockewulf190's picture

Every single fiat currency that ever existed has gone to zero.  Gold and silver are still around.  If you were to find some Reichsmarks in an old shoebox, they may be interesting to look at, but are essentially worthless.  Find some gold dubloons in an old ship wreck, your going to party your ass off.

Soul Glow's picture

Fiat currency is far superior

The definition of fiat means "by decree".  So you are saying that it is best to use a standard of time/value "by decree" than one which holds tangible value?

What if someone came to your bank and said "all of the units you are using to measure wealth are no longer of value".  How would that make you feel?  Because that would be done by decree, as such with the value of fiat currency.

MeelionDollerBogus's picture

periods of recession are shorter & less intense under a hard asset system.
Making liquidity scarce at those times is good & proper: it's what actually stops misallocation of wealth & permits savings to rebuild.
Permanent liquidity is actually bad for the economy. Gridlock is a solution, not a problem, because it's infrequent. It's like your immune system: it attaches to invaders & stops them. Permitting them full access would make you ill or dead. That's what we got now. No immune system, fiat liquidity is no-holds-barred, no immune system, no way to recover from illness.

Fiat currency guarantees inflation is not low: stating it's fine as long as inflation is low is like saying nuclear bombs are fine for keeping warm as long as you don't go critical.

Canadian Dirtlump's picture

Gold is proven. Like the faith you have in shaving companies because the hair on men's faces is always growing:

 

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2...

Deo vindice's picture

Aren't you supposed to put warnings on pictures that can frighten children (in this case, maybe even adults)? ;-)

fockewulf190's picture

My dog barked and left a pile after seeing that.....thing.