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The Wall Street Journal Hates Gold, Missed the Whole Bull Market

Commodities / Gold and Silver 2010 May 29, 2010 - 03:33 PM GMT

By: Gary_North

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleBrett Arends writes for the Wall Street Journal. He is a standard Establishment financial journalist. They are all anti-gold. I have read these people for 50 years. They never change. Their arguments never change: stupid. Their timing never changes: bad.

They ignore gold when it is at the bottom. They ignore it when it has doubled. When it has tripled, they write articles on why it's not a good investment, because it is overbought. When it has quadrupled, they call it a bubble.


Arends takes anti-gold hackery to a new level. He calls gold a Ponzi scheme.

Gold was $105 in 1976. It peaked at $850 for one day in January 1980. If there was a Wall Street Journal series on why you should buy gold, 1976 to 1979, I do not recall it.

Arends is writing a 3-part series for the Wall Street Journal, which has been anti-gold for all of my lifetime. That the Wall Street Journal runs a series of anti-gold articles is about as innovative as a New York Times editorial opposing a Federal budget surplus.

The case for a gold coin monetary standard is simple: no one should trust the United States government or the Federal Reserve System to maintain the purchasing power of the dollar. Since 1914, the dollar has declined in purchasing power by 96%. As Casey Stengel used to say, you can look it up. Unlike Casey, I'll show you where to look it up. Here.

The case for gold as an investment is different. First, it is an inflation hedge over long periods of time, though not necessarily in the medium term, e.g., 1980–2001. Second, it is a crisis hedge when the international capital markets are in turmoil. (So, for that matter, is the U.S. dollar.)

Gold is not a deflation hedge. It was for the whole world in 1930–33, when it was a price-controlled commodity that the Treasury would buy for $20 per ounce. It was for central banks and foreign governments, 1934–1971, when the Treasury would buy it for $35 an ounce. It is no longer.

There is a legitimate case against a rising price of gold in U.S. dollars over the next few months, based on the recent move of the Federal Reserve System, in conjunction with the Treasury, to shrink the FED's balance sheet (monetary base), which has been in progress for the last few months. You can see this here in a chart published by the St. Louis FED.

To understand Brett Arends, you must read his article, line by line. To help you do this, I will provide a running commentary. Note: I took on Milton Friedman on this issue on numerous occasions. Brett Arends is no Milton Friedman.

Let us begin.

A SAD, SAD DAY

The article begins: "This is a very sad day for me." I hope to make it sadder.

In Part One of this series, when I argued that gold might be about to go vertical, I made a whole bunch of new friends among the gold bugs.

And now I'm going to lose them all.

That's because even though I think gold might be about to take off, I don't recommend you rush out and put all your money into gold bars or exchange-traded funds that hold bullion.

This is rhetorical trickery. It is indulged in by hacks who have a hidden agenda, but who don't want to reveal it. It is also indulged in by wishy-washy non-forecasters, who want to cover their behinds when the market goes against them – either way, up or down.

First, he uses the word "might." "Gold might be about to take off." He wants to cover his backside when it does. After it does, he can say to any critics, "See? I said it might take off." Well, whoopdy-doo. The issue is this: "When did you tell people to buy? At what price? And how much?"

I told people to buy in October of 2001, just after 9-11. Bill Bonner, my publisher, told people to buy in 2000. You could buy gold at under $300 back then.

Anyone who recommended gold after it cleared $400 an ounce is a Johnny-come-lately.

Second, notice this rhetorical flourish: "I don't recommend you rush out and put all your money into gold bars or exchange traded funds that hold bullion"

Hack alert! Hack alert!

He creates a stick man: someone who says to put all your money into gold bullion bars (400 oz). Who is this someone? Who can afford 400 oz bars at $1,200 an ounce?

I don't know any pro-gold columnist who recommends that you rush out and put all your money in American eagle gold bullion coins.

OK, I did this in 1999. I put 90% of my money into gold coins. I sold half of them when it peaked in the third week of March 2008. I called that peak within 24 hours after the peak at $1,033. I warned my subscribers that gold and silver would fall. This is a matter of public record. Both metals fell. I figured in 2008 that when you make 300% on your investment, and you think it has peaked, it's time to take some profits. But I never told my subscribers to put 90% of their money into gold. I was crap-shooting in 1999.

I won. Yes, I should have stayed in, but I'm conservative. I go by Jimmy Napier's rule: "When someone puts a million dollars in your hand, close your hand." Also, I told my subscribers not to sell their coins, only non-coin gold.

I wonder what Mr. Arends' track record is with respect to gold. I wonder what percentage of his portfolio is ever in gold or has ever been in gold. I think I know.

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous.

Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Warren Buffett was merely quoting Milton Friedman, who used the identical argument. Friedman hated the idea of a gold standard for most of his career. For a good summary of his war on gold, read Hans Sennholz's obituary of him.

Sennholz taught me monetary theory in 1962. I have always taken his side against Friedman's position of fiat money.

Friedman argued that gold as a monetary standard is wasteful. The Wall Street Journal repeated it in an editorial in 1969. I replied to that argument in 1969, in an article titled "Gold's Dust." I argued that gold has a major economic function: restraining governments and central banks from inflating. You can read it here.

Warren Buffett has been in a lifetime revolt against his father's political legacy. His father was the Ron Paul of the late 1940s. There have only been two gold-standard libertarians in Congress over the last century: Howard Buffett and Ron Paul. Warren Buffett has always rejected his father's position.

So has the Wall Street Journal.

Here is my objection to the Journal: its long-term hostility to the idea of a gold as a legitimate and viable monetary system. This hostility to gold is basic to the acceptance of the modern fractional reserve banking system. It is basic to the acceptance of central banking. It is hostile to the idea that the masses should control monetary policy through a full gold coin standard, which is established by the free market and enforced through the law of contract. The Journal may run an occasional article on gold as a potential money-making investment (money defined as fiat dollars), such as this one, but the Journal has long maintained its support of a fiat money standard.

Arends goes on: "And that's not the half of it. Gold is volatile. It's hard to value. It generates no income." This is another standard cliché against gold. Gold is volatile. Right. So is the stock market. So are commodities in general. So what?

"It's hard to value." It is? You mean the commodities market's moment-by-moment pricing of gold is hard to value?

"It generates no income." What commodity does?

Land pays no dividends.

Arends knows all this. He offers this as an excuse.

Yes, it's a "hard asset," but so are lots of other things – like land, bags of rice, even bottled water.

It's a currency "substitute," but it's useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking "facility" still trying to settle their debts with cigarettes. That's gold. It doesn't make sense.

Are you beginning to sense that two of this guy would not make a halfwit?

We are not in prison. We are outside prison. If we have gold, we have a marketable asset. It is liquid. Land isn't. We can sell a tenth-ounce gold coin. How do we sell a bag of rice? How do we sell a carton of cigarettes?

As for being a "store of value," anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.

Quite true. And anyone who bought it in 2000 has quadrupled his money. Tell me about the Dow, which is down since 2000. Tell me about the NASDAQ, which is way, way down. See for yourself.

Did the Wall Street Journal tell people to get out of the stock market and into gold in March of 2000? No? Did it at least tell them in February and March 2000 that the market was a bubble? I told my subscribers that it was. The NASDAQ peaked the week they received my March REMNANT REVIEW warning them.

I get worried when I see people plunging heavily into gold at $1,200 an ounce. What if the price goes back to where it was just a few years ago, at $500 or $600 an ounce? Will you buy more? Sell?

I can see him, worrying about this. So, so worried. He is about as worried about this as I am about the anti-gold hacks' pension funds at the Wall Street Journal when gold is at $3,000 and the Dow is at 3,000.

"My concerns about gold go even further than that." They do? Will wonders never cease! "Let's step inside the gold market for a moment." Yes. Let's.

Everyone knows the price has risen about fivefold in the past decade. But this is not due to some mystical truth or magical act of levitation. It is simply because there have been more buyers than sellers.

Banal, but true – and sometimes worth repeating.

Banal, and not at all worth repeating. Banal because the anti-gold hacks never told investors to buy, all the way up. They missed the boat. If these guys knew anything about gold, they would tell readers to buy close to the bottom. They never do. Why pay any attention to them when they say it's too high?

"More buyers than sellers." Is this what it takes to earn a paycheck at the "Wall Street Journal"? When it comes to writing hit pieces against gold, it is. It has been for over 40 years.

The relevant question is this: WHY have there been more buyers than sellers (at yesterday's price)? What has happened in the international markets that persuaded buyers to bid up gold's price? Did they have a better sense of what would happen to the euro and EU finances than the experts at the "Wall Street Journal" did? (Note: that is a rhetorical question.)

"If the price rises you'd think there must be a shortage." Not if you understood gold, you wouldn't.

Most of the gold that has been mined for over 2,000 years is still above ground, either in someone's vault or on someone's wife. The marginal increase in production affects the marginal price. The question is not shortage. The question is this: the supply offered for sale to the general public compared to the demand offered by the general public.

If the price rose, then there was more demand than supply at the 2000 price. Or was Adam Smith wrong about this supply and demand thing?

"But data provided by the World Gold Council, an industry body, tell a remarkable story."

Over that period the world has produced – or, more accurately, recovered – far more gold than anyone actually wanted to use. Since 2002, for example, total demand for gold from goldsmiths and jewelers, and dentists, and general industry, has come to about 22,500 tonnes.

Say, that really is remarkable. All those gold buyers out there were buying more gold than – and I quote – "anyone wanted to use." That is so remarkable that it calls into question one of two things: (1) economic theory, or (2) the reasoning ability of Brett Arends. You know which answer I select.

"But during the same period, more than 29,000 tonnes has come on to the market." First, no one knows how much has come on the market through central banks' gold leasing, which is not reported as sales, when in fact it is sales.

The surplus alone is enough to produce about 220 million one-ounce gold American Buffalo coins. That's in eight years.

Arends ignores Indians' purchases. He ignores Chinese purchases. He ignores central bank purchases. He focuses on American coins, which hardly any Americans buy (sadly). The market for gold is the bullion market (central banks), the jewelry market, and the ETF market.

"Most of the new supply has come from mine production. Some, though a dwindling amount, has come from central banks." He does not know this. GATA has been trying to get this information for 11 years.

And a growing amount has come from recycling old jewelry and the like being melted down for scrap. (This is a perennial issue with gold. I never understand why the fans think gold's incredible durability – it doesn't waste or corrode – is bullish for the market. It's bearish.) So if supply has consistently exceeded user demand, how come the price of gold has still been rising?

In a word, hoarding.

Hoarding! The horror! There are people out there who hoard gold. But how many? There are very few coin stores. There are very few active buyers of gold coins. If people are buying 400 oz bars, they are people with a whole lot more money than staffers at the Wall Street Journal possess. They are people who are very rich, very savvy, and with a lot of wealth to protect. They have allocated a small percentage of their wealth in gold bullion.

Mr. Arends, as a salaried writer in a dying industry, thinks of how much gold costs in relation to his salary and his future pension. Gold is so expensive!

Not if you are a Saudi prince, it isn't.

Gold investors, or hoarders, have made up all the difference. They are the only reason total "demand" has exceeded supply.

Tell me why this principle of demand does not apply to every investment category. He used the word "investors," as well he should. People buy and hold, hoping the price will go up. What an amazing concept!

Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on.

And are we to believe that this does not apply to every stock, every bond, and every asset reported on by the Wall Street Journal?

This man is treating his readers as if they were economic imbeciles. If his readers continue to take him seriously after reading his article, then they really are economic imbeciles.

What do we call an investment scheme where current members' returns depend entirely on new money brought in by new members?

A Ponzi scheme.

There are hacks. There are also confused people who are in way over their heads. And then there are morally corrupt deceivers.

A Ponzi scheme is an arrangement in which the seller of an investment says that the investment will earn a high rate of return, all on its own. Then he uses the income from later buyers to pay off the early ones. It is totally corrupt. It is fraud. It is also illegal, except when done with the Social Security system and Medicare trust funds.

There can be asset bubbles. They are governed by the greater fool theory of investing. But a bubble is not a Ponzi scheme. Either Arends is morally corrupt or else he is an ignoramus who cannot distinguish a bubble from a Ponzi scheme. You decide.

Yes, as I wrote earlier, gold may well be the next big bubble. And that may mean there is big money to be made in speculation.

But I don't trust it as an investment.

I don't trust the analytical ability of Brett Arends. I suggest that you retain the same skepticism.

How can you square this golden circle? I'll tell you in Part Three.

I can hardly wait. I will get another shot at this incompetent hack.

CONCLUSION

In my book, The War on Gold, which I offer for free, I wrote about this sort of anti-gold journalism. I have been at war with it for over 45 years. I will have lots of opportunities to fight more of these battles, hopefully with people of greater intellectual firepower than Brett Arends.

The newspaper industry is dying. Hacks like Mr. Arends will have to find gainful employment doing something more productive. But the war on gold will go on. It will go on for the same reason that it has gone on: a high-level hatred of the public's attempts to shield themselves from the monetary destruction being engineered by central banks and governments.

For a copy of The War on Gold, click here.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2010 Copyright Gary North / LewRockwell.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Shelby Moore (author of "How Deflation Is Inflation")
29 May 10, 18:12
Gold responds to REAL interest rates

Thanks for that info about Warren Buffet's father. That gives my some more insight on Warren's probable pyschology.

I am surprised you did not mention the main reason that gold must continue to rise in price, i.e. that it is the regulator of real interest rates (which btw, is why gold price has been suppressed), and thus gold will rise as long as real interest rates are negative.

I submitted a more lengthy comment detailing this further at the following article:

http://www.marketoracle.co.uk/Article19888.html


Brad
01 Jun 10, 19:45
Gold - Deflation Hedge

Actually Gary, gold is a hedge against deflation according to real experts. Gary, do you mind citing the source of your follower that claims gold is not a hedge against delfation? You won't find a single credible expert who agrees with your claims, unless they are aligned in gold.

The fact that you have been reading the Wall Street journal for 50 years tells me a lot. Please leave the investment analysis to those who do research for a living and have no financial ties in gold.

The reason why Mr. North has not cmmented on Stathis' brilliantly accurant piece is because he realizes he is out of his league and his hack journalism cannot stand up to Stathis' expertise.

As for you Shelby, I would like to suggest that you find another place to market your book. You have shown you have no idea what you are talking about.

While the WSJ might be a hack publication, at least the reporter gets the facts straight about gold.


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