Monday, July 18, 2011

Gold’s Surge to a New Record Price Still Hasn’t Impressed the WSJ

By DoctoRx

The “Intelligent Investor” at the WSJ, Jason Zweig, writes today to continue the mainstream media’s theme that gold is a “bad” asset:
Amid such uncertainty, you can’t reduce one set of risks without raising others. If, for instance, you buy gold, you lower the risk that a collapsing dollar will crush your wealth. But you incur other hazards by paying all-time-high prices for an asset that generates no investment income, lacks intrinsic value and has a weak record of combating inflation.
Good to see that the conversion process of the MSM to the dollar debasement story has been so slow.

If I may criticize a bit, the average stock is at or near an all-time high (not the capitalization-weighted averages, though). The average price of the average thing you buy is at an all-time high. Of course gold should be at or near an all-time high.

The shares of stock you may own are either worthless paper or equally worthless electronic entries. That is all you own when you buy shares. So stocks, and bonds, have no intrinsic value. It is stocks that, when they start from high valuations as in 1965, have a poor record of holding value during inflations. Gold actually has a superb record in this regard.

On another point, the history of gold becoming money thousands of years ago, however, arose specifically because it was recognized as having an intrinsic value. As the Chairman said, that tradition continues. What I think we have been seeing for years during the gold bull market is a disinformation plan. While parties are held wherein needy people, or people who want to hold other assets, sell their gold, I think that smart money, including central banks, has been accumulating gold.

That accumulation may have begun just as the housing bubble was peaking. Housing stocks, those canaries in the coal mine, peaked around July 2005, before home prices peaked. It was then that gold began its lift-off phase:

Except for the bursts of enthusiasm in early 2006 and early 2008, and the panic in fall 2008, this has been one steady advance. Note this is on a semi-log scale, so that identical percentage changes in the price of gold are shown as equal intervals on the vertical (gold price) scale.

It just may be that the smart money quietly began getting into gold then. A man I regard as an investment genius, Bill Fleckenstein, wrote about two years ago that the gold bull market would not peak until Goldman Sachs was flying investors to see prospective sites of gold mines and the Street was creating all sorts of investment vehicles for the masses to invest in gold. In other words, he predicted a quiet gold bull market that would gradually build to a mania. 

The opinion of the WSJ’s “intelligent investor” today reassures me that the re-mainstreaming of the most basic store of financial wealth, gold, probably has farther to go, and probably at much higher prices versus Federal Reserve notes aka dollar bills.
Which, Mr. Zweig fails to note, have no intrinsic value. And have proven to be poor protection against inflation.

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