CFA Claims 3 Myths That Will Pop the Gold Bubble But Does Not Reply To My Critique

With the recent fall in gold and silver prices, those who have always hated gold and silver seem to come out of the woodwork in claiming the top is in. One advisor who continually wants to criticize gold as a viable investment, who also writes articles for a financial website, Seeking Alpha, is CFA Charles Lewis Sizemore. I have written about Sizemore before in; Many Financial Advisors Still Ignorant of Gold’s Place In A Diversified Portfolio. It is clear he has a bias against gold.

Charles Lewis Sizemore’s latest CFA rants against gold can be found in his article titled; 3 Myths That Will Pop the Gold Bubble. Below are the 3 myths where he tries to articulate his negative feelings towards gold.

Myth #1: Gold is an investment

Myth #2: Gold is a store of value

Myth #3: Gold is a contrarian trade

You can scroll down to the comment section on the Seeking Alpha site via the link above and read the following reply I made. But unlike last time when Mr. Sizemore and I went head to head in a debate on gold, there was no reply as of this writing, four days later. Maybe its because the gold bubble didn’t pop, I’m not sure. These gold bashers never told you to get into gold, so what authority do they have to tell you to get out?

The following doesn’t address each alleged myth individually, but collectively. The result being; gold is insurance and can be construed an investment since it has 10 years of going straight up; is a store of value if taken in the right context; and is a contrarian trade to government/Fed policy.

My reply;

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The common mistake those who criticize allocations to gold, even CFA’s like you Charles, is you pick the 1980 high, which was a blow-off top. The average price of gold for January 1980 was $675 for the month, but the most important missing link is the status of the U.S. dollar, after it’s initial struggles once Nixon took away its relationship with gold.

When Volcker raised rates in 1980, there was no other competition to the U.S. dollar and the high rates one could receive on the fiat notes made it an attractive alternative to gold (and silver). From 1980-2000, this continued as one might call these the glory years for the buck.

That changed in 2000 when the Euro was introduced. There became a viable alternative to the dollar. Subsequently, it became easier to invest in other alternatives via ETF’s, including many for gold and silver. This allowed those in countries without access to gold and silver a means of which to do so to hedge their own currency devaluation.

You have had a bias against gold the whole move up Charles. You ignore the financial data. You can’t look past the present and see into the future of how all of these things government has done will be paid for. You ignore the $4 trillion plus of sub-investment grade derivatives the banks have coming due in the next 5 years. You think rental property is a good buy, yet banks hold mark to fantasy homes on their books to avoid a tsunami of foreclosures, thus allowing people to live rent free for an average of two years.

And what about the Fed’s moves? You think that by keeping interest rates artificially low via quantitative easing and the buying of their own treasuries will get the economy going again? What happens when the American Recovery and Reinvestment Act runs out of money (they are 8% away)? Where will the states get their funds to maintain status quo?

What about the following:

Our Military Industrial Complex is unsustainable.
Medicare is unsustainable.
Social Security is unsustainable.
Our Manufacturing industry can’t compete with the low wages abroad and is unsustainable.
The FDIC is unsustainable as they are presently $8 billion in debt.
GM, Ford and Chrysler are building cars in other countries, but their overpriced cars selling here in America are unsustainable and so are their unions. The Fed still has 27% of GM shares to unload.
The Pension Guaranty Association can’t possibly keep up with the increasing number of defunct defined benefit plans and is unsustainable.
Real Estate prices where prices had risen too fast and still have not returned to earth are unsustainable.
As the economy deteriorates, employment becomes unsustainable as more people will be laid off.
U.S. cities and states can not possibly maintain status quo without drastic cuts as their business/financial plans are unsustainable.
Commercial real estate delinquency rates are rising and future growth unsustainable (for those that own all those REIT’s financial advisors have been selling you the last decade). There is a reason advisors sell those REIT’s…they make 6% to 8% on each sale. But of course they believe in them. But do they really understand the commercial real estate market today?

And you call the above “weak arguments?” If so, refute each one and give me the bright side.

But wait, there’s more….

A person can have faith in our future as a nation, but they have to open their eyes and turn off the damn television and do so research of their own and “invest” or “insure” accordingly. A stock market that is as overvalued as this one won’t become of value until P/E ratios are under 10 (certain exceptions of course). It doesn’t mean it can’t climb higher. But value is value.

During the Japanese credit contraction, which still hasn’t unwound, stocks fell 75%, real estate fell 75% and commercial real estate 90% and none of them recovered. The Yen is hanging on by a thread with the recent disasters. They may have to sell the $750 billion of U.S. treasuries they own sooner than later. What happens to the dollar then?

Regarding value, I have told you this before; a Roosevelt dime bought you a loaf of bread in 1964 and the silver content of it still does today (valued at over $2.00).

The only thing “as risky as tech stocks in 1999 and Miami condos in 2005” is believing the same government and Fed that got us into this mess will magically get us out. Impossible I say…and that’s why you own gold and silver.

What happens to the stock market and real estate when the Fed is forced to raise interest rates? Personally I think we’ll stay with low rates for some time. The Japanese example shows that a central bank can push the Debt to GDP ratio to extremes (Japan is at 220% before the recent disaster) and keep rates low. But Japan had something going for it that we here in the U.S. don’t. That is, they are a net exporter and hold the $750 billion of U.S. Treasuries…coupled with the fact 98% of their treasuries are owned by Japanese citizens. Things will unravel more quickly here in the U.S.

Our Fed interference will not have the same result. QE2 was just the beginning and gold rose quickly because of it. Future QE is a given. The question is when. Same with higher interest rates.

This is not 1980 Charles. And you are wrong about Utah’s plans. I spoke with Utah Representative Brad Galvez. It’s just the first step.

And lastly, Buffet bought $100 million of silver at $4 and sold at $5. He has no reason to favor gold because his fund makes money off of stocks. Like Morningstar and Money Magazine calling gold a long term bust, they all have a vested interest. Naturally you can see this connection.

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I am not sure why Mr. Sizemore did not reply this time. In a trial by jury, the defense and prosecutor go at it, both stating their sides. In this case, Mr. Sizemore wrote his article stating his side, and I stated my side. In every article I write for Seeking Alpha, I get involved in the conversation. I have made 332 comments on my own and other articles and have the following rating;

I do get some thumbs down on my articles. Mostly they come from younger “know it all’s” who like to badger people. I don’t claim to be perfect in what I write, but I can look at and analyze the data and make educated assumptions. When someone can honestly and intelligently refute the data, I’ll listen. When Congress implements austerity measures that actually eliminates the deficits and reduces, not freezes debt, I’ll listen. But as many of you know, I’m a Cubs fan. I’m used to disappointment.

Perhaps Mr. Sizemore will reply to my comment. If so, I will write about it here.

So what is really the gold bubble here? Is it our government and Fed policy or gold?

I have said this many times in my articles. Gold has a history as money and in times of uncertainty about our future, which is clearly the case today, long term the gold price will continue to rise. There is no gold bubble. I do welcome any dips so people can buy at lower prices. A stronger dollar might give us that opportunity. A stronger dollar only comes because of a weaker Euro, Pound, Yen etc. It’s an illusion as all of these currencies have lost over 200% to gold in the last 10 years, with the U.S. dollar leading the way at over 400%. It’s a race to the bottom for these currencies as countries battle each other for lower priced goods.

Consumers buy the lowest price they can find. A cheaper currency makes your countries goods more attractive. The U.S. is a net importer because of this. We don’t become a net exporter until we get our goods priced lower. That’s what drives consumer demand which makes up the majority of GDP.  We can’t have our goods priced lower until our wages decrease or the dollar becomes weaker. It is much simpler to make the dollar weaker than piss off the unions who contribute to congressional campaigns to maintain their power erm, I mean keep wages higher.

But look at what has happened in Greece, a country that can’t print their own currency and had to face the unions. The result is they are enslaved to the IMF and others, ala Iceland (even though Iceland is fighting this). Greece would prefer to have their own currency and devalue it. The IMF would prefer to keep them enslaved forever ala Jamaica.

Simply; A devalued currency makes gold more attractive.

Genesis 2:12 And the gold of that land is good…

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