Don’t buy another ounce of gold before you read this!
Today's Financial News - Posted August 18, 2008
In a world of doomsday prophets, seek rational advice before you buy speculative assets such as gold.
by J. Christoph Amberger
Baltimore — (TFN): The problem with most financial editors promising unlimited upside for gold is that they hardly have an unbiased perspective: The financial newsletter industry as we know it today has its roots in the late Jim Blanchard’s almost single-handed crusade for the re-legalization of private gold ownership in the United States back in 1974. Its protagonists have managed to build thriving businesses on selling gold on a message of unwavering gloom for decade after decade.
Their quintessential experience can be summarized in the first chart, depicting the (not exactly linear) ascent of post-liberation gold to its record high (1975-80):
What the aurophiles usually avoid to mention is that gold, despite the allround salutary qualities it apparently is imbued with, goes down as well as up in the short and medium term. And that unless you have an investment horizon measured in decades — not years or quarters — the ups and downs of the gold price resemble those of any other asset.
Indeed, gold has a rather checkered history as a stable repository of “value”. As is illustrated in the following chart depicting the half decade following the peak (1980-85):
By carefully selecting appropriate time series and — more importantly — avoiding to adjust historical gold prices for inflation, gold bugs like to create the illusion of a steady, unimpeded upward surge from $35 to $1,030. Which is true, if you allow for the kinks in the between:
Which, of course, is an argument you could also make for the U.S. equities that make up the Dow Jones Industrial Average. Just looking at the chart of 1971-2008, you get the image of an epic, uninterrupted upward surge. In fact, 1987 never happened, and 2001 was a minor blip. Time heals all wounds, and selecting long time series makes for epic bull markets: 
But unless you have the leisure and time to watch your portfolio ride out any disturbance over the decades, the truth lies somewhere in between. And the information you need to make the best of the markets should not be based on connecting two dots between 1971 and 2008 with a red crayon, extending the line to 2010 and call it a projection.
One of the gold experts whose acumen I learned to value back in my Taipan days is Marino G. Pieterse of Goldletter International. His June issue, which is available free online, would have saved you a world of hurt. I quote:
“Facing the myth of growing demand there also exists a myth on a decline in supply. The matter of the fact is that over the last ten years mine production stabilized at a level around 2,500 tonnes per annum, albeit, like on the demand side, showing a shift from traditional countries to emerging countries. Having reached a peak of $850 in January 1980, and interim lows just above $250 in both 1999 and 2001 demonstrate that gold is not consistently inflation proven and doesn’t distinguish itself from other commodities, including other precious metals, most notably platinum.
“According to GFMS, the 2007 average gold price of $695.39 was less than half the 1980 inflation-adjusted average of $1,546 and 1980s $850 adjusted for inflation would take the gold price over $2,100. Also, in the past five years inflation was stable at well below 3% annually, both in the United States and Europe. During that period the gold price more than doubled, thereby showing no correlation with inflation. Only since last year, because of the boost in energy and food prices, inflation has come under upward pressure to above 3%. Both the US and Europe have recently said to give priority to fight inflation. Consequently, higher interest rates are to be expected in the second half of 2008. This will probably end the decline of the dollar against the Euro and be negative for gold.”
Mr. Pieterse is Dutch and located in Amsterdam. He lacks the messianic intensity of his American colleagues and actually bases his published opinion not on extrapolation and generous assumptions but on analysis of actual numbers. I’m not getting paid to endorse him, we have no revenues sharing agreements in place, and we don’t accept options, free samples, or any other compensation from anyone. But do yourself a favor: Before you buy another ounce of gold as an investment, check Mr. Pieterse’s opinion out beforehand.
It will save you a lot of money and worry.
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Next Article: Commodities sell-off: The gold bubble is deflating
Posted by J. Christoph Amberger · Filed Under Gold and Resources, News that Matters
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December 1st, 2008 at 9:32 pm
Gold as a economic commodity has withstood the test of time. As paper markets rise and fall and rise, gold will always remain, and their real value will appear, no matter what protective measures the current market forces implement.