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Is gold a bubble waiting to burst?
A handful of gold jewelry
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TEXT OF INTERVIEW
Kai Ryssdal: Today's rally in equities, and quite a rally it was, took a bit of the edge off gold. The shiny yellow stuff faded just a tad after getting to within $10 to its all-time high. Almost $1,250 an ounce at the close in New York. Depending on who you listen to, like this guy you're about to hear, even at this price, gold's a screamin' buy.
Gordon Liddy: I'm Gordon Liddy and I want to share with you something that will protect your future in a very solid, very real way: Gold. It's never too late to secure your future with gold. Gold is an intrinsically valuable liquid preserver of purchasing power that has held value for over 5,000 years. In these tough times, that's more important than ever.
Yes, that was Gordon Liddy, the Watergate guy.
David Moon runs Moon Capital Management in Knoxville, Tenn. He's not quite as big a fan of gold at $1,200 an ounce as Mr. Liddy is. Good to have you with us.
David Moon Good to be here Kai.
Ryssdal: Last year, about this time, when gold was touchin' on $1,200 an ounce, it was all "Oooh! Gold bubble! It's gonna crash soon, it's gonna crash!" And then I read the other day, there are analysts saying it's going to go to $1,500 an ounce. Whatever happened to the bubble talk?
Moon: Well, I was one of the people that was involved in the bubble talk, and I have been wrong about gold for so long, I know longer have any respect for my own opinion, Kai.
Ryssdal: Well, let me start maybe then by asking you why is gold different? I mean, it's all the "safe haven" talk and "in times of trouble, that's where people go," but I mean, gold doesn't do anything. It just sits there.
Moon: You're exactly right. It was Charlie Munger, Warren Buffet's partner, says that you take gold, you take it out of the ground in Africa, you put it on a boat, you ship it to the United States and you put it back into the ground in Kentucky. Ninety-five percent of the gold that's ever been mined since the inception of human kind is still in existence. It's still out there, it hasn't been used for anything. Unlike silver or platinum or weapons-grade uranium, those are things that once they're brought into existence, they're consumed. Oil gets consumed. The only thing that causes the price of gold to go up these days is fear or greed. It's the same thing that caused Internet stocks to become overpriced in '98 and '99.
Ryssdal: Why do we pay attention to it then?
Moon: We've become anxious. Our anxiety gets focused on things. The reason we pay attention to it is because marketing works. When Glen Beck and Gordon Liddy are on television everyday -- I mean, don't laugh at this. But if they were advertising timber, which is a much better natural resource, timber prices would be higher, at least in the short term.
Ryssdal: Are there real macroeconomic reasons for gold being higher? Interest rates are at zero, you plow it into bonds and it goes nowhere. I mean, does gold make you any money?
Moon: It only makes money as long as people move their money into gold. There are micro-reasons that gold prices can go up, and that's what you've identified. And that is, that as long as the Federal Reserve keeps the risk-free rate of interest at zero, then money is going to move into all sorts of risky asset classes, including gold.
Ryssdal: Are you buying this $1,500 an ounce figure we're seeing?
Moon: You know what, I don't have a target for gold. There's no way to predict when bubbles will pop. It's the reason that short-selling any asset is dangerous, because an overvalued asset can stay overvalued for a long long time. Could it go to $1,500? Absolutely. Could it stay at $1,200 for a long time? Absolutely. Keep in mind that even though the U.S. government fixed gold prices at around $18.50 through most of the 1800s, the world price of gold spiked around $18.60. And it took 110 years for the price to recover to that point. Whether or not you make money in gold, as much as anything else, depends on the price that you pay for it.
Ryssdal: Are people ever going to get over it? It's historically ingrained that we want gold just because it's gold.
Moon: There are several things that are culturally, historically ingrained in us that we want. And most of those are ingrained for emotional reasons, and none of them are very healthy. And I'll leave it at that.
Ryssdal: David Moon, he's the president of Moon Capital Management in Knoxville, Tenn. Talking about gold. Mr. Moon, thanks so much for your time.
Moon: Good to talk to you.
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Ultimately, the question is not how high gold can go, its how low fiat currency can go. While the debate about whether gold is in a bubble or whether we are in a deflationary or inflation environment continues, the monetary authorities in the developed world have embarked on a well-publicized campaign of currency devaluation via low interest rates. Central banks can control interest rates or exchange rates � not both � and they are opting for record low interest rates with little concern for the debasing consequences. There should be no debate on this matter � central banks have a perfect track record in one area and that alarmingly is in currency devaluation. The US and Canadian currencies have suffered a greater than 95% loss in purchasing power since the inception of their respective central banks. Enquirica Research has published a report � �Guide to Inflation Hedging 101� go to http://www.enquirica.com/index.php?option=com_content&view=article&id=11... and signup for access.
My opinions are best expressed by Richard Russell, editor and publisher of Dow Theory Letters Inc in which he states, " Yes, I am certain that gold is the universal timeless standard of wealth. If man made it or if man controls it, the item can go wrong. It can disappear or go bankrupt. Gold stands along. Gold is undisputed, timeless wealth. If you can't understand that, if you can't take that in, you should not be an investor or an investment advisor. The crowning fundamental in investing is that gold is the true standard against which everything else should be measured." Published on August 30, 2010.
In response to David Moon's comments - Why I'm *BULLISH* on gold: I'm sure you're familiar with the saying: "An ounce of gold buys the same thing today that an ounce of gold bought 150 years ago -- namely, a fine-tailored men's suit." In other words, in relative terms, gold does not appreciate in value. However, that's not the end of the story. In times of extraordinary uncertainty, such as war, political upheaval, fiscal insolvency or runaway inflation, gold really "shines" as a neutral store of wealth. While Warren Buffett would never agree, I'm not Warren Buffett. I can't afford to lose everything. Nor do I have access to the privileged network of advisors that Buffett has. Here are the benefits, as I see them, to gold ownership AT THIS PRESENT TIME: (1) Financial markets are technically unregulated As in the days before the Great Crash of 1929, a lack of transparency combined with a lack of effective regulation allowed the "meta-market" to prosper at the expense of the naive investor. And while the SEC didn't exist then, they might as well not exist now. The SEC has become something like an old, toothless dog lying on the porch. It might rouse itself to bark at a few burglars -- but all the while its wagging its tail. (2) There are more exits than ever As if to make my point, high-velocity trading is light-years ahead of the SEC's ability to regulate it. Many (most?) of these trades are little more than technical "pump-and-dump" schemes designed to artifically drive a stock up or down. But the net effect is to create massive feedback loop that can annihilate shareholder value in seconds. This, I believe, was what gave rise to the "flash-crash". And gold is a hedge against this. (3) The government is technically insolvent The sum total of the government's liabilities hover in the $50 trillion range. And while the government can lie through statistics, certain markets, such as oil, demand payment in constant value dollars. Thus a barrel of oil is the best gauge as to what the dollar is *really* worth. And with the amount of money in circulation escalating, the value backing those dollars can only fall (GDP/money in circulation == value/dollar). So inflation is baked into the equation -- though it might be a decade before it becomes manifest. (4) People are technically insolvent We're seeing a record number of "hardship withdrawals" from 401K's and people taking early Social Security, for lack of a fallback. This will translate to a pullback in spending, which could cripple stock earnings. Since stock price is some multiple of earnings, there's plenty of room to fall here. Gold is a hedge against this. (4) Taxes are certain to rise -- and soon. The Bush-era tax cuts expire in 3 months. While I don't think any politician is fool-hardy enough to not renew them at some level, they probably won't be renewed at the same favorable levels of the last 10 years. This will fundamentally alter stock and mutual fund valuations downward -- especially those that depend on a 15% long-term capital gains rate to boost returns. While holders of gold are punished by the 33% "collectibles" tax rate, its unlikely to go up or down -- and some have hinted this rate should go down. But either way, this tax rate is more certain than any other security class at this time. (5) Its in the Bible I ask you, what other ancient "currency" still has value today as a currency (as opposed to an artifact)? Gold. Currencies may rise and governments may fall -- but gold stands alone in terms of continuity and universal appeal. There will be a period of very painful adjustments ahead for everyone. It will *feel* like a crisis -- but its a necessary part of the lifecycle to restore equilibrium to our economy. During this period of "recalibration", do yourself a favor and put at least *SOME* money into gold. --MarkW
The value of gold comes from several factors: 1. It's quite limited; a government or bank can't just print more of it. 2. There is some demand for it other than as a currency---some in computers, but largely in jewelry. 3. But most of those uses don't use up the gold, so unlike oil, for instance, you can buy gold, make jewelry out of it, and then sell it later if need be.
The appeal of gold in times like this is that its true value is basically constant. The government can't inflate or otherwise devalue it, like it can the dollar.
The Dow Jones average was under 1000 in 1981 and today it is over 10 times the 1981 price. Gold is up about 5 times from it's low around 250/oz, but gold is in a bubble and the dow is undervalued right ?
And Mr Moon says gold is not consumed but thank goodness it's not because all of the gold ever mined would only fill about 1/3 the Washington monument !
Finally when trillions of dollars of paper are being printed by central banks diluting their currencies each year, why should gold not rise in proportion !
PS:
The 185 billion paid to bail out AIG would buy all gold the IMF has at todays prices think about that when you think gold is expensive !
Cindy Mathieu states (below) that "gold is money". No. It COULD be money, if used for the exchange of goods and services (which is the defintion of moeny). Does not happen? No. Gold is merely a rare commodity, with value from its rarity (as well as from fear and greed).
The TREASURY BUBBLE is the next bubble to burst ... not gold. We have a Federal Government addicted to TRILLION dollar deficits. The world is not going to continue lending us that kind of money for much longer ... especially once they realize we plan to default by printing money and repaying them with inflated fiat currency.
A quick look at a monthly chart of the price of gold for the past 11 years indicates that the "shiny yellow stuff" is unequivocally in a powerful secular bull market, having risen 5 fold in a since bottoming in 2001. Meanwhile the broad stock markets have returned exactly zero in the same period.
Bubbles are characterized by general mania when seemingly everyone from taxi drivers to your golf buddy is talking about the investment (remember the NASDAQ?). Gold will officially be in bubble territory when Kai Ryssdal closes his broadcast with a summary of the gold price AND when he interviews someone who has something intelligent to say about it.
Mr. Moon implied that gold is not consumed like silver or platinum. However, aside from its value in jewelry and other decorative items, it is valuable as a coating for contacts on printed circuit cards in computers and other electronics because of two properties: it is malleable (easy to flatten) and is a non-corrosive conductor of electricity.
Mr. Moon implied that gold is not consumed like silver or platinum. However, aside from its value in jewelry and other decorative items, it is valuable as a coating for contacts on printed circuit cards in computers and other electronics because of two properties: it is malleable (easy to flatten) and is a non-corrosive conductor of electricity.
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