Why Does Gold Get No Respect?

20 comments

(The following is the second part of a series of articles by Chuck Cohen, one of the smartest investors we know. After the series concludes on Monday with “Gold as Insurance,” Chuck will be contributing to Rick’s Picks on a regular basis, focusing in particular on opportunities in junior gold stocks. RA)

Even after the recent rally, the stock market is still down about 35% since 2000, while the price of gold has risen almost 400%.  It seems logical, at least to me, to expect investors to have become a little intrigued towards gold. But strangely, that hasn’t been the case. Inexplicably, the long-term view towards stocks remains remarkably upbeat, as though the alarming problems of the past two years have vanished. Just look up the very recent Barron’s “Big Money Poll,” or read the comments of the same economists who never foresaw even a recession coming down the pike.

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Conversely, few people have yet to acquire gold in any form–bars, coins or mining shares. Gold in most people’s eyes is considered overpriced, dangerously volatile and perhaps even in a bubble — in short, too risky and too late to get into.  To try to prove that gold is still a poor, unwanted orphan, I am inaugurating a series of articles on gold in Rick’s Picks by posing a few questions, below. If you consider yourself a contrarian, you are especially likely to view gold as hidden from view and therefore very bullish. Speaking personally, and given the history of financial markets, I expect gold to rise until it culminates in the most spectacular run in the history of markets.

 Any Bulls Here?

Friends and Family: How many people do you know personally who own gold or gold mining shares? Have any of them called you to buy gold as they most likely had, to buy tech stocks in the late 1990s? Also, how many of them do you know that didn’t buy or refinance a home?

Financial Advisors and Institutions: Why do so few people or institutions own or even recommend gold in any form? If you have a broker or adviser, you probably know what I mean. If you mentioned gold to your broker, what was his reaction? Was it supportive or negative? Also, if you own a mutual fund check out how much of their assets are invested in gold shares.

The Financial Media: Most investors form their opinions from the coverage and advice given in the financial media. But why is it that so few of the regulars on CNBC or Bloomberg talk favorably about gold? In fact, when is the last time you heard Jim Sinclair or Jim Puplava, two of the staunchest and most articulate gold advocates, interviewed on CNBC?

European and U.S. Governments: This includes our illustrious congressmen and senators. Why is the West so opposed to the role of gold? Why do they always seem to wish only to sell it? Ironically, the actual recent bottom in gold in 1999 was nailed almost to the penny by the current Prime Minister of Great Britain, but then Exchequer, Gordon Brown. Through his shrewd sale Great Britain summarily liquidated its entire gold reserves. What is amazing is that even very recently, Mr. Brown, unrepentantly, is still pressuring the IMF to sell its gold.

At the same time, why are the fastest growing nations, all to the east — Russia, China, India and the Middle East oil nations, all very favorable towards gold? Consider this: If the anti-gold, Western nations are faltering and selling their gold while the pro-gold countries are accumulating reserves and buying gold, what should be the logical future effect on its price?

The Cash-for-Gold Phenomenon: After 8 years of a rising gold price, isn’t it reasonable that the media would be saturated with appeals to get in the action. After all, that’s what happened during the tech mania in the late 1990s, and then later during the housing bubble. I can recall seeing whole real estate sections in the newspapers. But when the word “gold” is heard, it is usually an appeal to sell your unwanted gold for “cash” or paper. Have you noticed how many “We buy gold!” signs you see. This is very strange.

Those Pesky “Gold Bugs”: Why are gold enthusiasts called “bugs”?  Have you ever heard of a dot-com bug, or a bailout bug?

John Paulson, arguably the world’s most successful investor (sorry Warren): After betting large against the banking sector and winning really big (up almost 600% in 2008), why has he now placed over 50% of his funds in gold and gold mining shares? Is it likely he will suddenly be totally wrong?

Gold Treated Differently

I hope you can see that attitudes toward gold are strangely different from those that govern more traditional investments. Since one of the attributes of the metal is that it serves as a guard dog against the unrestrained creation of credit, gold will remain an implacable enemy of the financial community and politicians. Soon, in future columns, I will try to get into this unspoken war and elaborate on some of the above topics in greater detail. To contact Chuck, click here.  If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)   Monday: Gold as Insurance

  • JPM July 19, 2009, 11:26 am

    There is a beautiful tale (as all of them) by Poe whose title is precisely
    “The gold bug”. I think that it is at the origin of the expression: Being (or not)
    a gold bug.

    Best regards,

    JPM

  • James from Maryland July 12, 2009, 2:08 pm

    Anyone catch the story from the G8 that Russian prez Medvedev produced a sample of a “world” currency? The coin in question was made of gold, a fact which the UK Telegraph failed to mention in its coverage.

    http://www.thedailybell.com/bellPage.asp?nid=444&fl=

  • David Zweig July 11, 2009, 1:20 pm

    There are modern ways of designing a sound financial system without using gold.

    I describe such a system in my article recently published at Financial Sense Online: http://www.financialsense.com/fsu/editorials/zweig/2009/0709.html

    Any comments would be appreciated.

  • Shailesh July 11, 2009, 8:43 am

    Dear Chuck,
    You have broadly indicated that West is selling gold and East is accumelating. You have posed a question about possible effect on price.I would like your view on overall fundamentals of gold market in this scenario rather than just the price flactuations.Afterall it will change the pattern of physical holding.Another interesting dynamic I would like you to explain is the magnitude of impact of physical holdings as well as trading by individuals [ as opposed to institutions and Goverments holdings etc.] on fundamentals of gold market. Incidentally , how does GFMS’ report saying about change in fundamentals of gold market corelate with all this – as I could not read the detailed report.
    Pardon my immature observations, if any – I am new to all this.
    Best of regards,
    Shailesh

    • ccohen July 14, 2009, 8:51 pm

      Shalish:

      That would require a lengthy treatise. Hopefully, I won’t get much into certain areas that I am not that conversant with. I intend to focus on market philosophy and how we can best prosper from these extraordinary times. Chuck

  • Frank July 11, 2009, 1:39 am

    Very good article and well written.

    I do, however, have one area of contention with Mr. Cohen and some of the commentors (i.e., AYN). There is mention over and over about all the “We buy gold” ads on TV, etc. I don’t know what they are watching, but I usually have FOX News playing, and I must say the “Gold sellers” (Goldline, Rosland Capital, Blanchard, Monex, etc.) seem to outnumber the the “We Buy” ads by at least 4 to 1 … but nobody ever seems to mention them.

  • Tahoe Billy July 10, 2009, 11:28 pm

    Rick has enlightened me greatly on fiat currency, gold and the Fed banksters, so has Ron Paul. I now live in a new world where I clearly understand the US Constitution and what it meant, and can also clearly see is has been “abolished”, “high jacked”, “murdered” by the “powers” behind the Fed. I don’t know “who” they are nor do I care, I just want both parties voted out of office and the dollar back on the gold standard.

    At parties lately I have been quizzinga few friends after drinks, “what is the ultimate job of the Federal Reserve”? After a pause I tell them “to suppress the price of gold”, and ultimately isn’t that true? While the seem to still be having a huge effect, they are in fact slowly losing the war, no?

    William

  • Doug Digger Eberhardt July 10, 2009, 8:10 pm

    Rick wrote:

    “Financial Advisors and Institutions: Why do so few people or institutions own or even recommend gold in any form? If you have a broker or adviser, you probably know what I mean. If you mentioned gold to your broker, what was his reaction? Was it supportive or negative? Also, if you own a mutual fund check out how much of their assets are invested in gold shares.”

    Couldn’t agree with you more Rick. I wrote a blog piece on this June 30th: http://fedupbook.com/blog/investing/gold-why-doesnt-your-financial-adviser-recommend-it/

    We as financial advisor’s (I was one for over 20 years and now write about the industry and other issues) were never taught that gold should be a part of a well diversified portfolio. In fact, gold was and still is listed at the top of the pyramid of risk while the dollar is listed at the bottom of the pyramid as “safe.” Tell that to seniors who have seen their defined benefit income purchase less and less.

    I think we both know why gold is never recommended. It starts at the top; the Fed doesn’t want any competition!

    I look forward to the “Gold as Insurance” article. I’ve written on this subject as well in my book on gold investing. This isn’t rocket science eh? Yet most of America still knows nothing about gold and the need to possess it, and most advisor’s are still clueless about it.

  • Ben July 10, 2009, 6:10 pm

    To Mr. Cohen,

    Thank you for your timely response to my questions. I see your point about blanket statements and smoking guns. Yes, it would seem the West is anti-gold (either that, they make one HELL of a facade). Which is why I leave open the possibility that they are perhaps not… However, after it giving it some thought I have concluded it would be better if they are indeed anti-gold. Much better, actually. This conclusion I reached as I pushed forward in my understanding of backwardation this morning.

    All a subject for another time, though. If an opening presents itself in the course of your commentary, I will make my thoughts known here on the forum. But if it does not, I still look forward to reading more. I think Mr Ackerman made a good call to bring in someone of your experience and knowledge to his daily commentary!

    Ben

  • Gerald Clifton July 10, 2009, 5:56 pm

    Chuck, the reason nobody is ever called a “dot.com bug” or a “bailout bug” is that Poe didn’t write any stories that mentioned either. He DID write a story called “The Gold Bug,” however, and, since language expands by metonymy, “fanaticism” got transferred from the Poe term to the gold crowd. At least, that’s my read on it. As you well know, the gold crowd tends to live out where the buses don’t run. Being among that crowd, I don’t think we’re ALL kooks (my PhD is in Literature, not geology) — some of us are normal people who simply can’t understand how monetary authorities can paper the entire universe, with no basis behind the paper, without consequences. After all, we didn’t voluntarily leave the last vestiges of a monetary gold standard (the Bretton Woods compromise) — we got forced out. Once you get kicked out of any joint, you have to figure out reasons why it is “their” fault and not yours.

    So, my simplistic read on monetary history since 1971 is that, if the monetary authorities won’t submit to the rigors of a gold standard, then I’ll just have to do it myself. So I back my cash with gold. I suspect that the silent majority among “gold bugs,” many of whom are far, FAR more wealthy than I could ever hope to be, are doing as I do. Money has to have a basis, or it is merely arbitrarily-decorated ink on paper. I suspect that many of the holders of the truly great fortunes out there (the ones you don’t see parading around on CNBC) are justifiably nervous about what their paper is worth, so they are simply going on their own gold standards.

    Or, in other words, if the government won’t do it, then protect your OWN ass.

  • Thad July 10, 2009, 4:05 pm

    Q) Could you offer a hidden pivot method for busy physicians who can’t closely monitor the tape during the day?
    A) So many markets have been so trendless for so long, KW, that it has reduced all of us to day/swing traders.

    Ditto that request. I would love to take the seminar, but I’m a Schwab-only (no futures, no options, no 1- or 3-minute chart) kinda guy. Don’t have the time to convert all the futures #’s I see to spot. If 1/3 of the numbers were etfs or individual stocks, and had more of a range of time frames, I’d sign up.

    Even if the the GDX weekly/monthly targets stay unchanged for days and weeks at a time, that would be valuable info that I’d pay for. It isn’t a goal for all of us to make money today(!), as long as nothing has changed to make me not still think I’m in the right trade for a month from now.

    I’m not saying switch to 100%, just don’t make the longer-term, general-access stuff be less than 10% of what’s on the site.

  • Paul July 10, 2009, 1:24 pm

    I am near speechless, maybe I am missing something but all that is happening is that Rick is on a much needed vacation? Correct me if I am wrong but he hasn’t handed over anything other than for a few days to keep the site running in his absence.

    It is a little callous to be chiding him for taking time off with his family for a few days. What should he do, turn the website off with a ‘closed for a family vacation, come back next week’ sign on the front page?

    As for the ‘some new guy’ I don’t know whether this was aimed at Chuck or Ira but I am open minded enough to realize I have something (probably a LOT) to learn from ANYONE that has been in the business 40 years and still has money in their account!

    Like I say, NEAR speechless…

  • Ayn July 10, 2009, 12:49 pm

    Every few minutes on television there is an ad encouraging viewers to sell their scrap gold/jewelry for cash. At least three firms (Cash4Gold, GoldEnvelope.com, and another whose name eludes me) are spending big money seeking to separate the public from its gold. Since these commercials are relatively new, it is likely that someday they will be used anecdotally to explain subsequent price action.

    But what does this phenomenon imply? Interest in gold is so great that the airwaves are flooded with commercials about it? Or interest in gold is so meager that the commercials advocate selling rather than buying metals? If its the latter, where were these ads at the bottom?

    I am nervously long gold…long because the technicals and fundamentals dictate being long.

    But nervous because every amateur technician extant sees that inverse head and shoulders bottom.

    And in the markets, what everyone can see tends to be a sucker play.

    &&&&&

    I think you have made a good conclusion, Ayn. Not only should this be a signal of a bottom but if you look at the chart of the major company, it has never gone anywhere in spite of its business and profits. One day all of the “worthless” jewelry will be gone and so will the cash for gold phenomenon.

    Chuck

  • Planet Mercury July 10, 2009, 12:37 pm

    I had just the opposite reaction than Al Freeburne; I think Chuck Cohen’s commentary is a real positive. Truth is truth, whether Rick, Chuck or anyone else points it out. Today’s short list of reasons why gold is likely going up from here longer term, not down, is a wonderful reminder of the REALITY of our current situation. Anyone involved with PM investment as an amateur knows you have to constantly fight the bombardment of anti-gold emotionalism that is on view each day. We need to have solid, common sense reminders that, as we look around at our our situation, it is very unlikely that friends, family and business associates have any exposure to PM. As below, so above. I would not call Rick’s judgment into question on who is and isn’t worth hearing on the topic. He seems to have proven he has a knack for making the right calls.

  • FranSix July 10, 2009, 12:34 pm

    I would advise to keep your gold investment to yourself going forward, because likely you’ll be thrown in with the bankers as having destroyed the economy. So, if you’re related to a family member working in a bank or bailed out corporate entity, a member of a trade union, and invested in precious metals, a moustache, a hat, a cloak and a private cell phone is in order.

    Deflationary theory is bound to be upheld going forward, because whatever the commercial banking sector could muster in defacto Quantitative Easing in the form of derivatives applied to ever sector of the economy and life itself is at the end of its ride. It was brief, about 6 years or so of triumphalism. And they set it all off against the oil price.

    It will be difficult to find a growth story going forward, but if its a growth story in the gold sector, you’ll be considered a kook.

  • Ferrous July 10, 2009, 12:05 pm

    I’m looking forward to Chuck’s insight. Sometimes the big picture helps me trade better by reminding me that there is a road map to consider. So far I like Chuck’s logic and I want to see what the justification for his gold stock picks are.

  • Ben July 10, 2009, 10:01 am

    Hello, Mr. Ackerman. Nice article, but there is one point that I would like to take issue with. And while at the end of it you said you would later expand on some of those points made be Mr. Cohen, I couldn’t wait to point out what I see as a flaw…

    “European and U.S. Governments: This includes our illustrious congressmen and senators. Why is the West so opposed to the role of gold? Why do they always seem to wish only to sell it? Ironically, the actual recent bottom in gold in 1999 was nailed almost to the penny by the current Prime Minister of Great Britain, by then Exchequer, Gordon Brown. Through his shrewd sale Great Britain summarily liquidated its entire gold reserves. What is amazing is that even very recently, Mr. Brown, unrepentantly, is still pressuring the IMF to sell its gold.”

    I know that Gordy sold *half* of the England’s gold reserves (at the the bottom, at that) but I was unaware that the other half was sold. When did the sale of the other hald take place?

    As for the EU, but I’ve not read in many places, of late the word is they’re aren’t interested in selling and are looking for more. This is new, like I said, so we’ll see about that.

    The U.S. … Well, here’s my take: We supposedly have the most gold reserves than anyone else. I would guess that they’re selling/leasing in order to prop up financials. Wheather they would sell/lease all in order to do so, vs creating a more orderly exit, remains to be seen however. While GATA has been pushing for that audit, I don’t think they’ll ever get it before this is over. And the reason is, if our gold reserves were audited at this stage of the poker game, it could have disasterous consequences. All speculation of course, but that is my point… how do we know the U.S. is anti-gold?

    If you could address those points, either here or in your furture article, I would appreciate it. Thanks!

    Ben

    &&&&&

    Ben:

    Thanks. I have already been corrected on the Brit sale. It was only one-half at the time so I was half right.

    It seems as though you are familiar with GATA and its emphasis on the different conspiracies which I tend to agree with it. I took some editorial leeway to make a blanket statemen there. I meant that, in general, the West is anti-gold because it constrains their unbridled creation of paper and they will use Goldman and some other institutions to discourage gold buying. I think that most observers have concluded through some pretty strong evidence that the markets are no longer “free.” Even Richard Russell has come to this conclustion.

    A lot of that is still speculation but there is a lot of smoking gun evidence that Bill constantly points out. Bill has not been invited on CNBC since 1999. CNBC is owned by GE as a matter of coincidence. I think that if we get into an open ended discussion of manipulation and proof, our points will bog down. It was just meant to be a general statement which I believe is true. It was never to be a major point of mine.

    Here is why. Gold has been moving on an exponential curve and sooner or later it will lift off whether or not there has been an organized suppression or not. Those who thinnk they can cap gold have been proven wrong and are about to be even more wrong. They can’t suppress a bull market where the fundamentals are constantly geting better.

    By the way, if the government was forced to admit that Goldfinger really did infect the gold and it is unusable, I would just shrug. After the past 10 years, would anyone be surprised by what comes out of Washington or NYC?

    The anti-gold sentiment comes from deductions that we have never heard a positive gold statement or seen anything that would indicate that the US is building up our reserves. In fact, the trillions of paper creation or fiat money that have entered through the paper door indicates that we can’t put anything that would hinder this policy.

    Chuck

  • Ken Wulff July 10, 2009, 5:32 am

    Hi Rick,
    I am a long-time lurker/fan/former subscriber who also reads you daily. Thank you for all your excellent educational contributions! I have two current requests-
    1. Could you offer a hidden pivot method for busy physicians who can’t closely monitor the tape during the day?
    2. Could you comment on Trace Mayer’s discussion of Mish Shedlock vs. Gary North re: the inflation/deflation puzzle? This issue is of huge practical significance to me. Thanks again!
    KW

    &&&&&

    So many markets have been so trendless for so long, KW, that it has reduced all of us to day/swing traders. Even so, an 899 target we’ve been using for August Gold implies that bullion is at the enticing end of its tedious range.

    Regarding Mish vs. North: There is nothing left to debate; the inflationists have lost. They are sounding more shrill, more bitter and more stupid with each passing week, as the CPI inflation they’ve been predicting since around 1991 fails to materialize. RA

  • Keith July 10, 2009, 5:03 am

    Many longtime gold bulls who have been in the market since the early 2000’s became disappointed to see gold fall during the financial crisis. It was the perfect storm to see gold soar to $2000 and beyond. Instead, it fell. It left many of us disheartened to see our gold stocks crash worse than most broad indexes. For one, many in this camp were of the hardcore inflationist variety like myself. I’ve come to realize that deflation is a monster that won’t give up easily. I know some that just won’t come to reality and admit that deflation has gripped the markets.

    In the long run I believe gold will still be the winner in the end. It just won’t happen the way I thought it would. When the financial crisis hit hard gold went down when least expected. Now I’m waiting for gold to go parabolic when least expected. It will leave most behind in the dust wishing they would have just held on a little longer. Price projections in gold is anyones guess. Maybe we’ll see the dow/gold ratio cross at $1000 per ounce. You just don’t know. What we can know is that in the end, gold will be king.

  • Al Freeburne July 10, 2009, 12:33 am

    Hi Rick, I’ve never written you before but I gotta say I’m pretty disappointed in your handing over the reins of your articles to some new guy. Why I have been reading you RELIGIOUSLY for the past past four years when all I am is a poor Au & Ag investor. Heck, when it comes right down to it I can’t even remember the last time I read the Mogambu and yet NO MATTER WHAT HAPPENS I always read your articles. Every one. Even tho I don’t do stocks anymore. At 63 I don’t even want to be involved in that stuff anymore. Time is precious. Just go long long Au & Ag and spend as much ntime at home in Oregon as I can. So. Heck. Bitterly disappointed ( not really). Maybe you could appear on your website as a guest commentator or something. In the meantime keep up the good work. Al ex Oregon

    &&&&&

    The “new guy” has been involved in trading since we were kids, Al. RA


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