Glen Beck, Gold, and Bubbles

  Executives from Glen Beck’s favorite gold company, Goldline, testified in front Congress yesterday. Rep. Anthony Weiner showed no mercy.

 “We’re talking about a classic consumer issue,” Weiner said at a House subcommittee hearing. “The television gold industry, led by [Goldline], is built on lies, fear and rip-offs.”

 While Weiner has a point, at least when it comes to Goldline being a predator, one has to wonder why Congress doesn’t share that level of outrage for the infinitely larger problem of payday loan predators? Is it because Goldline doesn’t have the lobbying power of the entire banking industry? Or because Beck endorses Goldline, thus making it a partisan hearing?

 On the very same day of the hearings there was another headline in the markets.

 Gold prices traded in record territory again Thursday as inflation-wary investors bid prices up near the psychologically important threshold of $1,300 an ounce.

  Gold prices gained $4.20 to settle a record $1,296.30 an ounce, building on gains it made after the Federal Reserve announced Tuesday it might take further steps to stimulate the economy. …

  Gold prices have nearly doubled since 2008, when an economic panic shook global credit markets and central banks responded by flooding currency markets. Since then, global economic uncertainty and inflation fears have spurred investors to shift money from stocks and cash into gold.

 The simple fact is that while Goldline might be stoking the hype and fear, people would be rushing into gold even if Goldline didn’t exist. The reason isn’t because of lies and rip-offs. The reasons are based on sound historical facts.

  The first thing I need to get out of the way is the Glen Beck Issue.

 I’ve been recommending buying gold since 2005 and in 2006. This is several years before Beck was being paid to pitch overpriced gold.

 Gold was selling for $515 an ounce back then and has increased 150% since. How many other investments have gone up at all since 2005, much less more than doubled?

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 Since I beat Beck to this issue by several years, I find it a little offensive to lump me, and every one else who recommended gold at the time, in with Beck. Glen Beck is a Johnny-Come-Lately to gold and a paid shill.

 To reject gold because Beck is associated with it not only misses the point, but its a stupid knee-jerk reaction that right-wing Republicans are famous for – rejecting a topic only because your opponent supports it.

 Don’t lower yourself to their level.

Regarding food and shotguns

 Back then some people rejected my investment advice for reasons that didn’t involve Glen Beck. They got repeated so often that I began seeing patterns. I would like to disprove those points immediately:

#1) “You can’t eat gold.”

Response: So? You can’t eat paper money either. Gold isn’t in competition with food. It is in competition with paper money.

#2) “You can’t put gold into your car’s gas tank.”

Response: You can’t put gasoline in your pocket either. See previous response.

#3) “Gold is only worth what someone is willing to trade for it.”

Response: That is true. It is also true of paper money. The difference is that to get gold you have to find it, dig it up, smelt it, and coin it. The stock of gold usually only grows at about 2% a year.

  Paper money, OTOH, can grow by infinite amounts because all you have to do to create it is punch some keys on a keyboard. This is why gold retains its value and paper money always becomes worthless in the end.

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#4) “Gold isn’t money.”

Response: Here is the simple answer:

Gold is money.

This statement always brings out outraged gold-haters. “You can’t buy groceries with it,” they shout. This point, while seemingly obvious, isn’t as correct as they would lend you to believe.

 For starters, I have to ask when is the last time they went to a grocery store? If they did they would notice very few people paying for groceries with paper money. Instead you see them using little pieces of plastic to pay. Are those little pieces of plastic money? No. The credit and debit cards represent money. The actual money is sitting in the bank vaults.

 Are bank money vaults brimming with paper money? No. They are filled with mortgage-backed securities, treasury bills, and gold.

 That’s right, gold. The largest hoarders of gold in the world are the many central banks. They don’t own the gold because it is pretty to look at. The only things they put in their money vaults is money.

 One other thing I should mention. As for using gold to buy groceries, it turns out that you can do it. With  you can get a debit card issued to you and use it at the grocery store to buy your weekly groceries just like everyone else. The difference is that instead of debt instruments representing your money, you would have your own gold and silver sitting in a vault.

 I personally don’t do this, nor am I incline to for personal reasons, but I thought I should mention it.

#5) “There’s not enough gold around to be a currency today.”

Response: Not at today’s gold prices there isn’t. But then there is no reason for gold to remain at today’s prices.

#6) “When currencies collapse you want a gun, not gold.”

Response: First of all, when whole societies collapse, only precious metals are money. Nothing else is. Precious metals became money without government coercion, and when the government becomes powerless, precious metals will return as money. For example, Roman gold and silver coins were still used as money during the Dark Ages.

  Secondly, every idiot in the country has a gun. Your gun isn’t going to impress them.

  Thirdly, society rarely collapses when its currency does. Examples include Weimar Germany in 1923, Zimbabwe in 2007, Russia in 1993 and 1998, and Argentina in 2001. The fact is that currency collapses rarely mean society collapsing. History is filled with examples of paper money becoming worthless, impoverishing whole sectors of a nation. And then the nation moves on and learns from the mess for a couple generations before they make the same mistake all over again.

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 There also used to be a couple points from the gold detractors that I don’t hear anymore:

#7) “Gold has been a horrible investment since 1980.”

Response: The price of gold was only above $800 for all of three trading days in 1980, so hardly anyone even had the opportunity to buy at the top.

  More importantly, that is ancient history. Gold has gone up for nine consecutive years. Anyone that ignores the performance of the last decade while focusing on the 1980’s is not someone you want giving you investment advice.

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#8) “You are only talking your book.”

Response: Gold has gone up 150% since I “talked my book”, so even if I was trying to “trick people into gold”, they still would have made a whole bunch of money. That’s the kind of sucker play I wish someone would trick me into.

  My objective in 2005 was to get progressive-minded people to make good investments. The last thing I want to see is right-wing wackos buying cheap gold and riding a bull market to hefty profits, while liberal-minded people sit it out.

 When I recommended gold again in 2008 (gold price now at $910) I heard new reasons why you shouldn’t buy gold.

#9) “Gold is a risky investment.”

Response: Gold is probably the safest investment you can make. There is really only one instance in history that caused gold to make a dramatic fall – Spain dumping stolen Incan and Aztec gold onto the market. Barring a half-mile wide asteroid made of solid gold hitting the Earth, that is unlikely to ever happen again. The huge gold strikes in California and South Africa barely even made a dent in the price of gold.

 All the other fluctuations made in the price of gold were caused by government and central bank manipulations, such as the London Gold Pool. After decades of central bank gold sales totaling thousands of tonnes, the effectiveness and willingness of central banks gold sales is diminished. Good examples include India’s purchase of IMF gold and the failure of the Second London Gold Pool.

 Even more importantly, it appears Peak Gold has arrived.

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#10) “Gold mining is environmentally destructive.”

Response: That is true. Gold mining is bad for the environment. However, I have to ask, “Have you given up driving your car?” Because oil production is far more destructive to the environment. Just look at the Gulf of Mexico. That one oil spill caused more damage than all the gold mining this century.

 The following year (gold now at $1,140) a brand new reason was given as to why people shouldn’t buy gold – it’s in a bubble.

  Because this theme has caught on, I would like to spend some time addressing it.

Golden Bubbles

 After witnessing the bursting of two massive asset bubbles in the last ten years you would think that people could spot a bubble by now. Unfortunately that doesn’t seem to be the case. So consider this a primer.

  There are two easy ways to identify a bubble:

#1) By the parabolic and unsustainable nature of the price increases.

For example, let’s look at some of history’s biggest bubbles.

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 Notice how all the charts look pretty much the same. Notice how they all peaked and collapsed in the matter of just a few years.

 Now look at what gold has done over the last decade.

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 Notice how the rise is gradual instead of parabolic. Notice the yearly corrections that the bubbles above don’t have.

 That’s the chart of a bull market, not a bubble.

Yet people have been predicting the bursting of the gold bubble since 2005. Every correction has seen gold doubters come out of the woodwork to declare victory over the hated yellow metal.

 That’s not to say the gold bull market won’t end in a bubble. What it does mean is that the gold market looks a lot more like Nasdaq in the early 90’s instead of Nasdaq of the late 90’s.

#2) The other element of a bubble, and really the only one that matters, is the mania.

Fear leaves the market. All that is left is the greed.

  Remember how everyone was getting rich buying Dot-Com stocks in 1999? Remember how people were spending the night in line for a chance to buy condos in 2005? Why? Because they were afraid they would be priced out of the market forever. That’s called panic buying, and its a classic characteristic of a bubble peak.

 So do you see any lines in front of coin dealers and mints today? Do you know of any clubs that get together to discuss the performance of gold mining stocks? Do you know ANYONE AT ALL that is heavily invested in precious metals?

 Chances are the answer is no.

 But I can go beyond just analogies. Here are some hard numbers in the form of charts.

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 To put it simply: It’s the opposite of a bubble mania. Almost no one is invested in precious metals these days.

 If global investment simply returned to historical averages, the price of gold would explode.

 Gold is shooting up in all the global currencies, not just dollars, as governments and central banks all over the world resort to more and more extreme measures to fight deflating asset prices.

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 The price of gold is rising for a very simple and logical reasons: the value of paper currency is falling. The global economic system is destabilizing.

 There is no secret element here. There is no scam (except maybe with Goldline). Gold is going up because the market fundamentals demand it. It will keep going up until this economic crisis ends and sanity returns to fiscal and monetary policy (which doesn’t appear to be anytime soon).

 So is now a good time to buy precious metals? I can’t say for certain. Normally this is a strong season for precious metals, but the charts say they are overbought at the moment.

 If your timeline is several years out I wouldn’t worry about the timing too much. For instance, if you bought when I suggested in 2005 and gold had a 10% correction shortly after, would you even remember that correction now?

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