Dave Ramsey Doesn't Know the First Thing About Gold

While surfing through the multitude of cable channels I’ll find shows of financial guru’s telling you where to invest your money.  One such guru who is known as a “personal-finance expert” and has his own one hour show is Dave Ramsey.  I remember Dave Ramsey in the past as I had recorded one of his shows where he was telling people not to invest in gold.

Unfortunately that show somehow got erased on my DVR but I did manage to go to his website and research what he has written about gold.  Bottom line is, he thinks “it’s a bad idea.”

But instead of doing his own due diligence and thinking for himself, he refers his audience to the work of Jeremy Siegel, author of; “Stocks for the Long Run.”  Ramsey had this to say about Siegel’s comments on gold;

In Jeremy Siegel’s book Stocks for the Long Run, he reveals what would have happened to a single dollar invested in bonds, stocks and gold since 1801:

One dollar invested in bonds in 1801 would yield $13,975 today.
One dollar invested in stocks in 1801 would be worth $8.8 million today.
One dollar invested in gold in 1801 would be worth $14 today.

What Siegel fails to explain to the reader, as well as Ramsey lackadaisically relying on someone else to do his thinking for him, is that gold was money up until 1933 when the U.S. government told their citizens to turn in all but $100 of their gold.  Also, from 1934 to 1971, gold backed Federal Reserve Notes and it’s price was fixed.  It was only after 1971 that the price of gold was allowed to trade freely and only in 1975 that U.S. citizens could buy more than $100 worth of gold again.

So I ask, is it a fair comparison to put gold against stocks or bonds when one of those asset classes price is controlled?  Of course not.

Gold; Inflation, Deflation and the Fear Factor

Ramsey goes on to quote more of Siegel’s conclusions;

“In times of financial stress, in times of inflation, when there is fear for the [currency], gold does well,” Siegel said. “Once the fears are past, gold goes back down.” Why would you want to buy it at its peak price?

This again is misinformation.  According to the author of the book “The Golden Constant” by Roy Jastram, who traced the relationship of gold in times of inflation and deflation for 400 years, it was concluded that gold’s purchasing power actually falls in inflation and rises in deflation.

Think of it this way.   If the price of a one ounce gold coin stays the same, and the value of the dollar decreases (because of more printing of dollars), your gold coin would buy you less.  On the other hand, if the value of the dollar increases (contraction of the money supply), then the gold coin would purchase more goods.  It’s purchasing power has increased with the rise in the value of the dollar.

So with that we can refute the “inflation” comments of Siegel and supported by Ramsey.

As to the “fear” factor, we can look to just last year and see that gold fell during the financial bubble that was popped last year all the way to November.  For that matter, gold has been rising since most of the stock market run to its all-time high as well as the real estate market run to its all-time highs.  From the year 2000 – 2008, gold has finished each year higher and it will again this year.

Ramsey’s Conclusions About Gold

Ramsey goes on to say this;

Many people think if the stock market collapses, we will use gold to buy things and survive. This is insane! Remember the aftermath of Hurricane Katrina. People bartered with essential commodities. They could not have cared less about gold.

Ramsey here first talks about the stock market collapsing as if that really mattered.  It is the currency that collapses that one needs to “insure” themselves against.  Just ask the people of Argentina during their monetary crisis in 1999 – 2002 or the people of Iceland just last year where they saw their currency devalued by 75%.  Do you think they would have preferred to be in gold?  Iceland had better economic numbers than the U.S. when their crisis hit.

The people affected by hurricane Katrina in New Orleans could still use U.S. Dollars to buy things couldn’t they?  This is not an apples to apples comparison to a real currency crisis like with Argentina or Iceland.

Is Gold Really Volatile?

Dave goes on to say;

Gold is a volatile, precious metal—it’s flighty and can fluctuate sharply. You’re much better off owning mutual funds and paid-for real estate. If you are beyond Baby Step 3 and want some gold, just save up and buy yourself a gold watch!

This is where most people miss the boat when it comes to gold.  Gold is not falling. Gold is just a shiny rock.  It didn’t change in the last week.  It’s still a shiny rock.  But the U.S. Dollar appreciated of late thus causing the U.S. Dollar price of Gold to fall.

What matters is the currency that gold is priced in.  While the current trend is U.S. Dollar up and gold down, in Europe, it’s EURO down and gold up.  This is another area that U.S. financial advisors don’t understand because they think everything revolves around U.S. investments.  It doesn’t.  There’s a whole world of investors out there and most have a better understanding of gold than Americans.  CNBC used to mock it all the time until this latest run up in price.  Even Dennis Gartman was on CNBC saying “you can’t eat gold.”  Well Dennis, you can’t eat paper dollars either.

As to being better off owning mutual funds or paid-for real estate, that would depend on the timing and how long you plan on holding it.  Holding stock for the long run was good at one point in time as stocks used to pay good dividends.  They don’t anymore so you are left with capital appreciation as a means to become wealthy.  This is a very tough time in our history to find much capital growth in U.S. companies, but there has been capital growth in the gold mining sector.

Past Performance Is Not Indicative of Future Performance

If one wanted to really compare apples to apples with gold, then they need to consider that from 1971 to 2000 there wasn’t much competition to the U.S. Dollar and it was king.  Couple that with a productive manufacturing base and it was a good time to be investing in stocks.

But since the year 2000, that dynamic changed.  The introduction of a major competitor to gold arrived with the EURO and since then with the multitude of ETFs that allow an investor an easier way to invest in gold directly as well as the various other commodity, currency and alternatives available that help one diversify away from the U.S. Dollar.

What’s Needed to Hedge the Next Decade of Turmoil in the Markets

While the U.S. Dollar is currently rebounding off its lows and gold dips from its highs, there will come a time when the March 2008 low in the Dollar Index will be taken out.  While most in America are invested in U.S. stocks, U.S. bonds and treasuries, and a little in cash they don’t have much protection, outside of a little in foreign stocks to hedge against what these assets are priced in, U.S. Dollars.

If you understand that DOW 10,000 In 2009 Is NOT the Same as DOW 10,000 In 1999 – It Buys You 23.8% Less Today, you’ll realize that gold will give you the insurance you need to help stabilize your portfolio and that it’s not a “bad investment” as Ramsey, per Siegel, would have you believe.

Advice From Dave Ramsey and To Dave Ramsey

The advice from Dave Ramsey is to “only invest in something that has a good long-term track record.”  Well Dave, in case you didn’t know, gold has over a 5,000 year track record.  Is that a long enough track record for you?

The U.S. Dollar on the other hand has only a 38 year track record without gold backing.

To Dave Ramsey I say, do your own due diligence from now on.

UPDATE:

There is a recording of Dave Ramsey where he calls gold a “commodity.”  This cuts at the heart of where Ramsey is mistaken.  In one sense, he’s right, gold is a commodity.  But the reality is that for centuries (and remember from above that he believes a track record is important), gold has been viewed as money.

It’s not about the end of the world Dave Ramsey.  I’m not looking over my shoulder in fear.  I do understand the economics and boom and bust cycles and what the eventual consequences will be.  It is about insuring the U.S. Dollar portion of your portfolio from a falling U.S. Dollar caused by the government and Fed abuse of the monetary system.  Not once in this segment did he address the falling dollar although he does get it right about the left and right destruction of the economy.  He just thinks there are no consequences to this that are U.S. Dollar negative.  I do.

Related posts from the Fed Up Blog:

1. Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?
2. How Gold Would Be Used In Hyperinflation