There were two negative articles on gold today that were filled with misinformation. While gold has been getting hit lately, something I have been cautioning traders about recently, it is expected that the gold basher’s would come out of the woodwork. But the problem lies with the flawed analysis these journalists are utilizing in drawing their conclusions.
Bloomberg Article Comparing Gold to Checking Accounts for Last 30 Years
Today an article by Bloomberg journalists claimed Gold Can’t Beat Checking Accounts 30 Years After Peak. This is misleading in the sense that it’s picking a point in time, an artificial one month high in the 1980 gold price, as a starting point for their analysis and using that as their means for deriving their conclusion.
Using that type of analogy we could also point to the NASDAQ all-time high of 5132.52 in March of 2000 and today’s price of 2185.54 and conclude it too hasn’t kept pace with checking accounts but worse, lost more than half its value. So why invest in the NASDAQ? Same story, but not as severe, with the DJIA.
The Bloomberg article also assumes that everyone bought gold at the all-time high when just a month before that all-time high, gold was trading for about half that value. Is the all-time high prior to 2008 a fair starting point to do an analysis of gold versus interest bearing checking accounts? No.
When Should the Comparative Analysis of Gold and Checking Accounts Begin?
In 1971 President Nixon took the U.S. off the (backed by) Gold Standard. This means that for the first time the U.S. dollar was left to its own merit as a store of value and medium of exchange. Because the piece of paper has never been known to be a store of value, an interest rate was attached to it years before to give the people the illusion it is a store of value. The Bloomberg conclusion was that interest bearing checking accounts have outperformed gold for the last 30 years.
I’m not sure why they didn’t just say savings accounts instead of checking accounts as that is where most people would deposit excess monies, not the typically lower paying checking accounts which if my memory serves me, didn’t even pay interest back then. I’m sure their analysis reflected this and they used the rates that savings accounts paid.
So the proper starting point for any logical analysis should be 1971, not 1980. In fact, 1975 was the first year U.S. citizens could start buying more than $100 worth of gold since 1934, so I’m giving an advantage in the analysis of four years to the savings account side as there was no “free market demand” for gold driving the price of gold higher during that 1971-1975 time-frame.
Gold Versus Checking Account Analysis 1971-2008
It just so happens I’ve already completed this analysis back in June of this year in an article Confused About Gold and the Dollar? Understand Their Relationship Before You Invest. From that article;
Let’s take a look at the dollar’s performance after Nixon took the U.S. off the gold standard in August of 1971. The price of gold in August of 1971 averaged 42.73 an ounce. Beginning with $42.73 in 1971, the short-term savings account would have returned you $350.87 while the long-term one year asset would have returned you $832.93. The Dow Jones Industrial Average return would have been $425.34, again without dividends, but keep in mind that stocks since 1971 weren’t paying anywhere near the dividends like they had been.
The Conclusion of that article?
Remember, the price of gold In June of 2009 was about $960 an ounce. It proceeded to take off to hit a high of just over $1,200 an ounce just last week. Here was my conclusion back in June:
What you are seeing folks is the decoupling of gold from the dollar, short and long term bonds as well as stocks. Since 1971, gold has outperformed cash, stocks and bonds, yet you never see your financial adviser, sans a few, recommend gold as an investment. Why is that?
The answer is simply they can’t make any money selling it…so they don’t, plus the fact they don’t understand it. Most people don’t understand gold as an investment or how it fits into one’s portfolio.
Gold needs to be a part of every person’s portfolio. Gold is insurance as the dollar falls. Gold is the wealth you need to pay for things. Gold used to back the dollar. Now it has decoupled from it.
So while Bloomberg tries to convince you that gold can’t beat checking accounts, please know the truth is, gold has and long term it will get much worse for the U.S. Dollar and those interest bearing savings accounts, current slide in the gold price aside (which again, was expected).
Street.com Article Asking if Your Money Is Better Off in the Bank
In the Street.com article, “Gold: Is Your Money Better Off in the Bank?” the author just makes silly assumptions.
In fact, based on TheStreet’s calculations, it seems that gold would have to rise and stay at significantly higher levels than the current one in order to beat the earnings that an investor would accrue in his or her interest-bearing savings and checking accounts — even at the measly savings rates today.
Suppose, or example, you deposited $10,000 in a 0.221% interest-bearing savings account today, the rate that appears on bankingMyway.com. Excluding monthly contributions, and including an annual interest compounded monthly, you would end up with $10,223. Similarly, you would accrue $10,135 after ten years in an 0.134% interest-bearing checking account.
It isn’t an awful amount of money saved after ten years, but consider this: it seems like much more work to hold onto the gold that you buy today with the hope that it will, at the very minimum, be worth $1,188 an ounce in ten years. That’s how much the gold needs to be worth for you to earn at least as much as what you would get from your savings account. And it would have to hit at least $1,178 an ounce to be on par with your checking account.
Does anyone see the flaw in this author’s assumptions? There are many.
First we have the assumption that gold, which has increased in value year over year since the year 2000 won’t continue increasing in value when all our government and the Fed are doing is adding more debt at an unprecedented rate. Does theStreet.com not think this has repercussions?
Secondly is the fact the $10,223 of accumulated value after 10 years would have the same purchasing power as today. The reason you own gold is to hedge your U.S. Dollar priced assets against the fall in the purchasing power of the U.S. Dollar. Anyone purchase items 10 years ago that aren’t more expensive today? Does it take you more dollars today to purchase those items? Anyone think that we won’t have more inflation in the future as a result of the deficits and debt of today that our government can’t seem to curtail, but add to? The dollar has declined about 40% in value the last five years alone.
The article also didn’t take into account that the holder of the bank account would have income taxes to pay each year, even if they never touched it. Granted there would be taxes when one sold their gold, but there are ways around that.
I will give the author credit in the following statement but that was buried on page 2 of the article;
Indeed, it appears that the odds against a rise in gold prices are limited, if we are indeed on a trajectory towards a series of earlier-than-expected interest rate hikes in response to signs of a U.S. economic recovery. Many are convinced that the Fed could soon pull back on its easy-money lending, economic stimulus policies, which have kept interest rates at a near-zero.
If the “odds against a rise in gold prices are limited,” then why write an article “Is your money better off in a bank?”
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About Doug EberhardtDoug 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
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