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Friday, April 24, 2009

25. Rational?

My cousin sent me a link from the alleged investment expert Jamie Dlugosch. The title of the article is “There is no place for gold on the global financial stage.” Mr. Dlugosch states that he “…despise[s] gold and everything it stands for” and that investment in gold is “hogwash!” He then lays out his five “expert” reasons for not investing in gold.

I have no idea what qualifies Mr. Dlugosh to hold the title of “expert.” But what I do know is that his five reasons seem to come more from a novice than any sort of thoughtful expert.

Since mid-2001, gold has risen from $260 to almost $1,000 an ounce. Although it has retreated recently to the $900 range, it is likely preparing for another major run upward. During this same time I’ve listened to investment talking heads on TV bash the buying of gold while gold ignored their advice and continued to climb higher in value. During that same time we watched tech stocks bubble, burst and lose 85% of their value under the Clinton administration. The real estate market bubbled and, to date, has lost 35% of its value. All this while gold increased 285% in price.

So, even though this site is primarily about politics, I’m going to take the time to go through the five points and refute Mr. Dlugosch’s arguments. But then, maybe this is about politics. I suspect that Mr. Dlugosch is probably a disciple and kool-aid drinker of the messiah and doesn’t want to accept that Obama is destroying the dollar, our economy and our way of life. In doing so, this then leads to gold being a very good investment and hedge against losses in other markets.

So – let’s begin…. Here are Mr. Dlugosch’s five reasons for not investing in gold. I have selectively edited his comments on each point. My rebuttals follow each of his thoughts.

1. There Is No Inflation. “….Today, the numbers do not support an inflationary environment and fear over current spending and stimulus of the government creating inflation is misplaced.”

Apparently Mr. Dlubosch actually believes government inflation figures, probably the most manipulated and inaccurate reports produced by the feds. The higher inflation, the more the government must pay in Social Security, government salaries and pensions, etc. It is to their benefit to keep the figures low. I don’t need an official report to know that inflation is alive and well in the US.

The Obama stimulus package, budget, massive borrowing and the Treasury simply printing another trillion dollars to throw into the economy, all work together to devalue the dollar and destroy the economy. Certainly, he can’t believe that this isn’t happening and that all those reasons don’t work to increase the value of gold? Well, maybe he can.

2. Gold Prices Are Easily Manipulated. “Unlike paper currency that is impossible to manipulate in any way, gold can be accumulated by a group of connected buyers for the sole purpose of eliminating supply from the market.”

Wow, amazing. He actually states that paper currency is impossible to manipulate. Someone needs to tell George Soros about this. Based on just one comment he made in an interview about the French Franc, the franc plummeted in value the following day. Or what about China's persistent manipulation of the value of the yuan? Doesn't Mr. Dlugosch read the financial news?

Is the price of gold manipulated? Yes, just as the stock market, oil, corn, wheat other commodities, real estate and currencies are manipulated. And who are the biggest players in these manipulations? It is banks and governments which regularly manipulate currencies, stocks, bonds and commodities. But much like the stock market, these manipulations are short-term moves. The market will always find its correct level over time.

3. Gold Is In Limited Supply. “Those who want to return to the gold standard fail to appreciate that at some point a lack of supply could have disastrous consequences in a gold-based system.”

Yes, there is a very limited supply of gold in the world, only about two Olympic-sized pools worth. It is one reason this metal gets the adjective “precious” in front of its name.

But as fiat currencies become worthless and individuals turn to something to preserve their wealth, precious metals such as gold, silver, platinum are at the top of the list. China has even begun to hoard copper as a hedge against falling fiat currencies.

Is it viable to have a gold-backed currency? Probably not, but that doesn’t make gold a “hogwash investment” over the next 3 to 5 years.

4. Gold Was Dead For 20 Years. “For more than 20 years, the price of gold did nothing. If you invested in gold, you wasted your time. That all changed with fears of inflation and hedge fund speculation several years ago. Today, the church of gold is full of believers. What changed?”

Yes, that is true. But from 1975 until early 1980, gold was a fantastic investment, going from $35 to $860 an ounce, a return of over 2,300%. Mr. Dlugosch, all investments move in cycles. Stocks tend to move in twenty-year cycles. From 1920 to 1940 the Dow Jones Industrial Average moved from about 110 to only 130. From 1960 to 1980, the DJIA again went sideways from about 600 to 800. That was an average annual return of merely 1.45%. But that doesn’t mean that stocks weren’t a fantastic investment between the years of 1940 to 1960 and 1980 to 2000.
If you bought real estate in Southern California in 1989 you watched as the value of your property declined 40% and had to wait another ten years for the value to return to your original purchase price. Investment-wise, was that a good ten years for you? On the other hand, if you bought real estate in 1994 and sold it in 2004 you did quite well.

All investments have periods of boom and bust.

5. The Dollar Is The Global Currency. “Do not underestimate the strength of this country as compared to the rest of the world. Predictions of our demise are premature.”

I agree, we are still a powerhouse of a country. That does not mean that the dollar cannot go into crisis nor is it premature to sound the alarm at the direction we are being taken by the Obama administration and a complicit Congress. Our government is moving in the same direction as other fallen empires by destroying our monetary system and our economy through excessive borrow and spend policies. I’m sure there were those shortly before the fall of the Roman Empire who insisted it couldn’t happen as well. With computers and the internet, it can happen almost instantaneously. Civilizations and empires also come and go in cycles. And even if this is not the end of the United States as we know it, it again does not mean that gold is not a good investment right now.

Mr. Dlugosch founded and edits a newsletter called “The Rational Investor.” I guess we’ll see just how “rational” his advice really is over the next three to five years.

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