Rebuttal to article Gold Is Worthless. Buy At Your Own Risk | Buy Gold and Silver Safely at 1% Over Wholesale Cost

In Thursday’s Current Thoughts I write that I was bullish on gold and silver no matter what the outcome and said the following; “Gold can still move up to $1,400 on momentum and short covering and any move higher towards that number I would be a seller, especially for mining stocks.”

Gold got to $1,368 on that run and closed at $1,315 range and today is opening up in Asia as high as $1,336 so far and silver as high as its resistance at $17.99. This may trigger some short covering of the sellers who thought we had topped on Friday after the $50 drop in gold from the highs. But a nice market maker trick is to push to new highs so $1,400 is still on the table for now.

Brexit is two years away, but some serious damage has been done to the markets. It’s not 2007-2009 era trouble yet, but the markets are definitely feeling some pain and I would use any bounces to sell longs.

The dollar is moving up with gold but if the market gets a nice leg down then gold and especially gold mining stocks will take a hit as the dollar continues a march to 100 again. From there it will be decision time for gold. My book research tells me what’s coming next and I am sticking with it for now. But my book also is VERY bullish gold for a MULTITUDE of reasons for the long run. We’re just trying to get this micro analysis on the right side of the trade and so far I have done ok with that.

Earlier today, on Seeking Alpha in the comment section on my last article I was asked about buying leveraged ETFs that short gold. Here is my response written before the gold/silver markets opened higher in Asia.

“personally I would like gold to hit one more higher high to $1,400 to trap more longs before a move down. Not sure the dollar moving higher will allow it though. I wrote on Thursday in my Current Thoughts that no matter what the outcome of the vote I leaned bullish gold but did not expect a big push. However, that thursday before the run up I did say that as we approach $1,400 I would be a net seller. We got to $1,362 and closed at $1,316. DGLD would be the most riskiest. If you play it, just have a pre planned stop in place. I can enter what I think is a good trade many times to catch the beginning of a trend and not get hit hard but reap larger rewards, simply by keeping a stop when I am wrong.”

There was an article on Seeking Alpha today that I had to make a comment on as the author didn’t seem to have a ragap on why gold should be part of a diversified portfolio. The article was called; Weekend Reading: Gold Is Worthless. Buy At Your Own Risk. I think the author purposefully wrote that title because he simply wanted people to read his article and get paid to do so by each person who clicks on it. I say this because his reply to what I wrote

Allow me to counter some of your comments regarding gold as I don’t think you quite have a handle on it based on a few of your observations.

First, off, before there was currency, there was gold as a medium of exchange. Research what goldsmith’s were and the issuance of promissory notes which led to these “notes’ to be backed by gold. It is trust in these notes that made them currency. Federal Reserve “Notes” “FRNs” were at one time exchangeable dollar for dollar into gold and during the bank runs of the 1930’s, this was put to an end and the FRNs changed from being “redeemable in gold” to “redeemable in lawful money.” To restore confidence in banking, this was the time when the FDIC was established, to give the illusion that your money in the bank for the first time was backed by something other than gold. I won’t go on from there but we all know what these FRNs are redeemable in today, more FRNs and the FDIC illusion started at $40,000 and is now $250,000 (illusion in the sense that when there is trouble, a simple rule change satisfies depositors of dollars as to their safety at the bank).

“gold isn’t backed by the purchasing power of any specific currency nor is there interest rate parity to govern its relationship with other currencies.”

You seem to think that gold needs to be backed by currency when originally it was currency that was backed by gold. This is what most people think when they analyze what money is today. But if you bury your gold in your back hard 10 years ago, dig it up today, it’s the same gold. So what changed? What it is priced in changed (the scrip your country uses). Sometimes that currency does better than gold, sometimes it doesn’t. It has to do with the trust the individual using the currency has versus other currencies as the dollar, for example, is simply a representation of: 57.6% Euro, 13.6% Yen, 11.9% Pound, 9.1% Canadian dollar, 4.2%, Swedish krona, 3.6% Swiss franc. This Dollar Index is what changes over time just as the price of gold changes over time.

“So gold doesn’t have intrinsic value, isn’t backed by any fundamental macro variables, yet people still see it as a safe haven asset? Remember, a safe haven asset must store value regardless of market conditions. Clearly gold does not fit the bill.”

A U.S. dollar has no intrinsic value, isn’t backed by any fundamental macro variables, yet people still see it as a safe haven asset? Let’s look at the dollar in just the last 10 years. At times it did well, at times it did lousy so it cannot be viewed as a safe haven asset using your “must store value regardless of market conditions” rule. If the dollar goes down, gold goes up as it did from 1971 (when Nixon first took us off the gold standard) through 1980 and 2000-2011. The was not a store of value from 2000-2011 as the Index declined from the 120 level to just under 75, a 35% loss.

“For example, as the market plunged by 3.6% on Friday, gold gained 5%. But this correlation does not hold up over the long-run:”

You now switched to comparing gold to stocks. Both stocks and gold lost value during the 2009 financial crisis. Gold can’t be viewed as a stock. Some stocks however become worthless over time, and that can’t be said of gold; ever. Gold is a different asset class and as part of a diversified portfolio can hedge the U.S. “dollar” value of your portfolio (U.S. stocks, U.S. bonds, U.S. money market; all dollar based). What other hedge from currency loss is more reliable?

Your final conclusion is: “Gold has no intrinsic value and hence cannot be viewed as a safe haven asset.”I beg to differ. The same can be said of the dollar, stocks at time, and gold. If you have a diversified portfolio, or can use an asset allocation strategy in actively managing your portfolio, one can take profits in dollar denominated assets just as they can in gold by taking from what is reaching all time highs (DOW over 18,000) and putting it into something that has been beaten down (gold). For both you can put a stop loss in place.

Lastly, re: Warren Buffet you can see my reply here (I’ll take Warren’s father’s advice on gold more than Warren – he understood, as a U.S. congressman, what governments can do to our money: http://seekingalpha.com/article/3983292-investing-legend-interest-owning-gold-just-explained-price-going-rise#comment-72509782

I do make these types of observations and more on investing in my forthcoming book Illusions of Wealth, which should hit the market through Amazon very soon. https://illusionsofwealth.com/

The author’s reply to me was this:

“Hi Doug, thanks for the historical perspective. But I believe it’s just that, history.I talked about what backs currencies in another comment. Currencies have value not because we trust it, it’s because we can readily purchase goods and services with it. If $1 can get you a cookie today, it can probably still get you a cookie next week. There is no certainty with gold. It can go up, it can go down. Unless we go back to the gold standard, I do not believe that gold has intrinsic worth. There is nothing that governs its price movement other than the fact that people want it more today, for their own reasons.”

My reply back to him;

Traveling Investor, you can choose to ignore history if you want. Let me explain it to you with silver, as it too was demonetized in favor of the scrip that you ignore the history of.

A 1964 silver quarter could almost buy you a gallon of gas in 1964. That same quarter today, exchanged for the scrip of the day, can still buy you a gallon of gas based on the average price in America for gas (See gasbuddy.com and coinflation.com). A 1965 quarter can get you 25 cents worth of gas today.

So to use your cookie example, If 10 1964 dimes can get you a cookie in 1964, Those 10 same dimes can get you a a lot more cookies today when exchanged for the current scrip, FRNs worth $12.80. However, 10 1965 dimes, or $1, can get $1 exactly $1 worth of cookies today.

This has nothing to do with a gold or even silver standards, but history shows one clearly maintains its purchasing power over time.

You said; “There is nothing that governs its price movement other than the fact that people want it more today, for their own reasons.”

To make a comment like this ignores what backs dollars. In fact, if you Google “what really backs the u.s. dollar,” Google seems to have chosen, out of all its definitions, the definition from my website. This definition states that is is the “full faith and credit of the U.S. government.” It is governments that decree what legal tender is. But it is the weakness of government that eventually leads to the failure of all currencies throughout the “history” of mankind.

I said before there are times when the dollar outperforms gold and there are times when gold outperforms the dollar. One of these assets has a “history” of 46 years without a relationship to gold.

Which one you trust may be contingent on who much faith you put in the group of men and women who run our monetary system. Those who own gold or know their history, have a little insurance in gold or silver “for their own reasons.”

Sovrn

About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534

Disclosure:

Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.

Current Thoughts for 6/26/2016

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