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Ground-breaking WSJ story on gold

Thursday, July 09, 2009

This story about investing in gold (hat tip NG) that appeared on the front page of the Wall Street Journal's Personal Journal section is ground-breaking in many ways, the most important of which is that it paints today's financial advisers as being just about the dumbest guys in the room.

Clicking on the image to the right will get you a much larger, readable version of the page and, for those of you with WSJ subs, you can get the entire front page in .pdf form here($). Fortunately, the article itself is in the free area of the online Journal.

Why is this ground-breaking?

First, it's in the Personal Journal section, not the Money & Investing section and, while they've had similar stories like this over the years, I can't remember one that dominated a section of the newspaper like this one does.

Anyone who picks up today's paper can't help but see this story in which author Larry Light talks glowingly about the yellow metal. Although he comes up short in a few areas, probably due to not having covered this topic in such detail before, his heart seems to be in the right place, his views clearly unaffected by how money makes its way into his wallet.

To wit:

Catching The Gold Bug
Worried about a harrowing, inflation-ridden future, Scott Van Steyn has found the answer in a batch of glittering one-ounce gold coins. In fact, they make up a large chunk of the physician’s assets.

“There’s 2,000 years of history to show that gold is the best thing to own during bad inflation,” says Dr. Van Steyn, a 45-year-old orthopedic surgeon in Columbus, Ohio. “People used to laugh at me for buying gold. They don’t anymore.”

More and more investors are acquiring physical gold, or bullion, in the form of small bars the size of iPhones or coins like American Eagles and South African Krugerrands. Individuals’ bullion purchases almost doubled last year, amid apocalyptic panic over the financial system, to 862 metric tons.

Lately, that panic-driven demand has given way to a more subdued, yet still potent, fear that stocks will suffer as the recession grinds on for a long time, so gold makes sense. At the same time, there’s a rising anxiety about inflation among people like Dr. Van Steyn, resulting from the Obama administration’s massive stimulus spending.

“When you’re in uncharted economic waters, people buy gold,” says Shawn Price, manager of the Touchstone Large Cap Growth fund, which holds several hundred ounces of the stuff.
While Mr. Van Steyn's views are indicative of the changing mood of retail investors who, after the bursting of two or more gigantic asset bubbles over the last ten years still have money left to invest, the comment by Mr. Price is somewhat puzzling.

The total of "several hundred ounces" of gold is not a lot of gold for a mutual fund, especially one that has over $400 million in assets, according to this entry at Yahoo! Finance. By my calculation, that $250,000 or so allocation to gold is not only less than one percent, it's less than a tenth of one percent.

Certainly a quick calculation would have been in order here, though you can't really argue with what Mr. Price says.

The report goes on to talk about flagging jewelry sales, decreased mining output, along with the surge in investment demand over the last year or so and then turns to the "experts" on personal wealth management - financial advisers.

That is, the people who have been wrong about gold for almost ten years now and have been steadily losing money for their clients while continuing to earn fees for their effort.
Many mainstream financial advisers, however, are leery about owning gold in its physical form. “If we get total chaos, are you going to chip off a piece of your gold to buy milk at the store?” says Michael Goodman, president of Wealthstream Advisors in New York.

And while they often recommend putting 10% of your portfolio into commodities such as gold for the long term, a number of advisers think that no gold should be included, physical or held in other vehicles such as exchange-traded funds. The thinking is that gold performs best during times of unrest, and not so well at other times.
The fact that a "financial adviser" can't make any money from clients if they recommended the client go out and buy some gold coins and put them in safe deposit box pretty much precludes this as a common recommendation.

This is an important point here, one that the author should have broached in some way.

As for "chipping off a piece of your gold to buy milk at the store", there's an easy solution to that one - it's called "junk silver". In a worst case scenario, pre-1969 silver coins that people of all walks of life have long since removed from circulation because its metal content is roughly ten times its face value will do just fine to buy milk in any Armageddon-type outcome.

Then there are the performance claims from the financial advisers.
Over the past four decades, gold has been one-third more volatile than the Standard & Poor’s 500-stock index, and yet has delivered a lower return: an annualized 8.4%, versus 9.1% for the S&P index, says Steve Condon, director of investor advisory services at Truepoint Capital in Cincinnati.
I don't know where Mr. Condon gets his data, but if I go back 40 years, I find gold at about $40 an ounce versus $917 today - an annual gain of 11 percent. As for the S&P 500, it's average 1969 value is right around 100, which, when compared to today's 885 level produces an annual gain of about 7.5 percent.

At least the investment performance wasn't based on the 1980 peak when, for a few days in January of that year, gold spiked some 30 percent.

Ooops, that was a bit premature...

Here comes the 1980 comparison and the "poor inflation hedge" mantra that every financial adviser must have committed to memory by now.
As an inflation hedge, gold’s record isn’t perfect either. After reaching a record high of $850 per ounce in January 1980, gold’s price fell almost 44% in two months. It didn’t reach $850 again until January 2008, meaning it was flat while inflation rose 175%, Mr. Condon calculates. Indeed, today’s gold price is far below its 1980 apex when inflation is factored in: That $850 is worth $2,206 in today’s dollars.
I'll be the first one to tell you that gold was a terrible investment from 1980 to around 2000. But, that doesn't mean that it will always be a terrible investment.

Aside from gold stocks, gold bullion has been about the best investment of this decade, a fact that still seems to be beyond the grasp of most financial advisers.

A couple more man-on-the-street stories follow, all of which make much more sense than what the investment "professionals" have to say, and then we come to Mr. Richard Dempsey who just told the world he has gold coins at his home in New Jersey.
Gold’s tangible quality is reassuring to its owners. Gold owner Richard Dempsey, 63, a vice-president at Bank of New York Mellon, keeps some of his 60 gold coins in a safe at his Point Pleasant, N.J., home and some in a safe-deposit box. “I like to know it’s there,” he says.
Anyone who owns precious metals in physical form should know that there's very little upside to telling people that you have tens of thousands of dollars worth of valuables in your house. It's not clear who's dumber here - the interview subject or the author.

The topic of gold versus gold mining stocks is then discussed, Mr. Light doing a fine job of distinguishing between the two.
Gold-mining stocks often don’t correlate well with ETFs dedicated to physical gold, and sometimes lag the price of gold. SPDR Gold Shares, which holds gold, returned 4.9% last year and 5.4% in 2009. Meanwhile, Market Vectors Gold Miners, owner of mining stocks, lost 26% in 2008 and is up 11.6% this year. One problem is that miner stocks track the broader stock market, and gold prices don’t. Another is that the miners have capital costs and can waste money on fruitless digs.

The truest gold buffs, though, want nothing to do with ETFs or mining stocks. Mr. Martenson, who runs an investing Web site, dismisses them as creatures beholden to untrustworthy managements and financiers. “I’ve lost faith in how Wall Street does business,” says Mr. Martenson, who keeps more than half his portfolio in bullion.
Earlier in the story it is learned that Mr. Martenson is a scientist who favors gold over other forms of money, a view with which it is easy to agree.

It's funny how those who have not had formal training in the ways of modern finance (like myself) can so easily come to conclusions about gold that are so different than those who have had formal training.

Maybe funny isn't the right word there...

A bit more discussion about futures markets, insuring gold stored at home, coin premiums, tax issues, and a breakdown of global demand round out the discussion in what is really a pretty good, highly favorable article about gold as an investment.

Lastly, this comment from a financial adviser (comment #2 at the WSJ online) just serves to reinforce how dopey these people are sounding after losing money for their clients over the last ten years.
Garry Stoklas wrote:

While I agree that gold has never been worth zero and it has been used for thousands of years as a medium of exchange, It isn't worth any more than what you can trade it for. If you have gold and want food, the gold is only worth something if the person with food is willing to trade what they have for your gold. As noted in the article, gold is worth a very small percentage above the 1980 high and worth considerably less when you take inflation into account. I'm a financial advisor. I get client who regularly ask my advice on owning gold. The majority of those interested in buying gold are concerned that we will have a total or near total collapse of our financial system. What I tell them is that if it makes them feel better prepared, go ahead and buy some. But if they truly believe in a near or total collapse, they would be better off having food, water, fuel, guns and ammunition stored. Gold is only worth what someone is willing to trade you for it and you certainly can't eat it.
If only financial advisers could make money by recommending gold...

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Ted S. said...


Just in case you missed it.. they also had a little teaser for this story at the top left corner of the front page in section 1. It's like they're getting paid to promote the stuff...

Dan said...

Yeah, I have a friend who is a financial advisor. He's "highly educated" and overpaid, the whole bit. I bought a lot of gold in 2004. In 2005, I told him he should buy some gold... he laughed at me. In 2007 I told him he should buy some gold... he laughed at me and told me that Real Estate is, "where it's at". All (yes, all, with no exception) of my friends and colleagues with finance degrees or MBAs possess little to no financial or business acumen. What are they teaching in our schools?

Chuck Ponzi said...

Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of fools, but fools do not imitate the successes of the wise.
- Plutarch

Chuck Ponzi said...

BTW tim,

Your last line:
If only financial advisers could make money by recommending gold...

I read that as you meaning that Garry Stoklas is poo-pooing the idea of buying gold because he earns no commissions on it. Huh.

If that's the case, how do you see his recommendation to buy food, water, fuel, guns, and ammunition... all of which are also excellent inflation hedges.

Just wondering why you give the guy a hard time when it seems to me he's actually giving good advice. If you're really worried about a collapse, gold is not a good asset to hold.

Anonymous said...


Not to be picky, but...

1.084 ^ 40 years = approx 25

25 * $40 = $1000, which is about right

Love the site, I come here often!

Thanks for your work.

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