CFA Calls Gold a "Lousy Investment" – Sorry, Gold Is Insurance Against a Declining Dollar

I’ve spent months on this blog commenting on negative articles on gold written by financial advisors, journalists and Certified Financial Planner’s (CFP) trying to get them to reply.  I did receive a personal email from the CFP explaining his position saying that he agreed with me and one reply from a financial advisor that eventually recommended putting 5% into gold despite his negative article Don’t Believe the Hype About Gold.  Most however don’t want to debate me on the significance of owning gold in one’s portfolio.

On November 23rd, I commented on a Certified Financial Analyst’s (CFA) article on Benzinga; The Stock Idea Network called “Gold is a Lousy Investment.” CFA’s are known as the experts when it comes to financial advice.  They are the one’s who advise mutual funds what to buy and when to buy.  They have to pass three difficult tests to obtain the CFA designation.

In this particular case, there was some of what I agreed with on the CFA’s short term analysis, but only to a certain extent which I will explain in a moment.  But it was the premise of his argument against gold that I disagree with in his calling gold a “lousy investment.”  He is calling gold, not an investment but a “trade.”

Yes, gold can be a “trade,” but it is also insurance against a falling U.S. dollar.  The CFA points to an article by the The Intelligent Investor saying that;

In the past 35 years the price of gold in the open market has advanced from $35 per ounce to $48 in early 1972—a rise of only 35%. But during all this time the holder of gold has received no income return on his capital“

He points out that the author of the above statement, Benjamin Graham (mentor to one Warren Buffet) “logic is sound.”

Think about this “sound logic” for a moment

Between 1935 and 1972, the price of gold was fixed by the government.  There was no free market in gold during this time frame.  People couldn’t even buy more than $100 ounces of gold until 1975.  The only “sound logic” during this time was that the price of gold was suppressed.

What happened when the free market was let loose to buy gold in 1971 and the U.S. citizens in 1975?  The price of gold shot up from $35 an ounce and hit $850 by 1980.

The CFA then makes the following statement about the 2008 meltdown and gold price action

“It should also be mentioned again that it was the hated US dollar — not gold — that investors ran to during the 2008 meltdown.”

While this is true, gold did finish the year with a calendar year gain, it’s eighth in a row.  But this comment also doesn’t explain that during this current run up in the markets, gold has also moved to its all-time highs.  Why?  Because the “hated” dollar has fallen and is close to testing its all-time lows.

The CFA goes on to say;

Gold may have already peaked, or it may well have another 50% surge left in it. I have no idea and will not hazard to guess. It’s impossible to say what gold is “worth” because it has no intrinsic value. And you never know how irrationally high a bubble will take a given asset.

To this I would counter with we do know how rationally low the dollar can become as other nations have experienced problems with their currency as recently as last year with Iceland and not too long ago with Argentina.  The culprit?  Government debt for the most part.  Again, the dollar is close to its all-time low because of government debt and out of control spending.

Short Term Gold Analysis

Where I can possibly agree with the CFA is in that for the short term, gold has taken off to new highs but the dollar index hasn’t confirmed a new low below the March 2008 mark of just under 72.  Until that happens, this very well could be a short term “bubble” as the CFA notes.  However, just today, the dollar index hit a 15 month low and is moving closer to the 72 mark and gold hit a high of $1,186.  The action in the price of gold to new highs seems to be predicting a fall below 72.  Will the March 2008 mark be taken out?  No mention of this dynamic by the CFA.

The fact of the matter is, the dollar and gold have been inverse of each other since the year 2000.  Gold has gone up every single year since that time and will do so again for the 9th straight year in 2009.  Gold is insurance against a dollar decline, plain and simple.

As I pointed out in my reply to the CFA’s article, the only thing that is highly speculative is blind faith in an asset that has 38 years of existence without gold backing.  That being the U.S. dollar.

As long as the dollar index continues to fall, gold will not be an “asset bubble.”  While it has gone higher from my first caution here in the price of gold at $1,058, there have been a few catalysts that have occurred that catapulted gold higher.  That being the Central Bank of India buying 220 Tonnes of Gold, Vietnam lifting its gold import ban and the Russia Central Bank buying more gold.

The IMF only has so much gold to sell

Then what?  What other Central Banks are contemplating buying more gold?  And for that matter, if gold was such a “Lousy Investment” Mr. CFA, then why do all Central Banks own it?  Answer:  As insurance against a failure of their currency, and at the same time giving people the illusion that something backs their currency.

In the U.S. we can’t even audit the amount of gold our Central Bank actually holds in Fort Knox.  Why all the secrecy?  Wouldn’t holding such an asset that is breaking to all-time highs be good to expose to the People in letting them know there’s some sort of fall back if things go bad for the dollar?

No, the game is secrecy.  The People aren’t entitled to know.

In the end, the CFA had this to say;

My advice, again, is not to sell gold.  By all means, take advantage of this speculative mania to make some quick money if you have the stomach for the risk.  But keep your perspective — this is a short-term, highly-speculative trade, not an investment.

While he does say to hold onto gold and take advantage of this self described “asset bubble,” the only speculation is how long the dollar will hold above the March 2008 lows, not what the eventual movement in the price of gold will be.

Gold will eventually have a reversal.  This reversal could be severe enough that people will compare it to the fall of the price of gold in January of 1980.  However, the price of gold won’t be going down if the dollar doesn’t also reverse course.  The dollar index is the key to watch.

Flashback 1980 and Volcker’s Intervention

Remember, it was Volcker’s decision to pay high interest rates on dollar based assets that lured people away from gold.  At that time, there was still faith in the U.S. dollar as there was really no other place to put money where the risk was deemed safe.  Today, the Fed is doing nothing to support a stronger dollar by raising interest rates as the Fed is telling everyone they want low interest rates for an “extended time.”

It will be difficult for the dollar to attract investors with there being very little interest paid on it.  People right now are seeing a better return in gold, even though it isn’t paying interest.  Today, there isn’t much faith in the Dollar that has lost over 13% this year while the price of gold has risen 44% in the last year.

Gold may be due for a correction, but holders of physical gold care not that it falls to $800 on its way to $2,000 and higher.  Nothing goes straight up or down, but the government action of bailing out, stimulating, spending beyond its means for new, existing and potential government programs has its consequences.  Eventually, the dollar will break that all-time low and gold will be north of $2,000.  That’s why you own it, “lousy investment” or not.

I’ve written a white paper you can download for free called “How Gold Investment Can Secure Your Retirement Years”  (I don’t collect email addresses) Download and read immediately by clicking here.