Wikinvest Wire

What does Bloomberg have against gold?

Monday, December 07, 2009

Following on the heels of David Pauly's inane commentary on the rising gold price last week as documented here, gold bashing shows up in the "straight news" section of Bloomberg this morning in this story by Nicholas Larkin and Millie Munshi.

Gold Can’t Beat Checking Account 30 Yrs After Peak
Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5,000 years during the last peak in January, 1980.

Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back.

“You give up a lot of return for the privilege of sleeping well at night,” said James Paulsen, who oversees about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet.”
Yes, it's easy to "data-pick" in order to find support for any notion that you have in your head, whether it's that gold is a lousy investment, stocks are a lousy investment, real estate is a lousy investment...

Just establish a premise and go back as far as you need to go and you'll be able to rationalize nearly anything in today's financial world.

The interesting thing about the January $850 gold price, however, one that Larkin and Munshi probably haven't got a clue about, is that gold traded at $850 an ounce for less than a day.

It closed at over $800 an ounce in London on only two days - January 18th and 21st, 1980 - and closed at over $700 on only four days.

The average price in 1980 was not much over $600, yet, that doesn't stop people from saying, "Gold has only gained x percent since its high of $850 in 1980" which, these days, is still a lot better than saying how much it lost, something that owners of gold had to listen to up until just a couple years ago.

This happens with the Nasdaq too where the index averaged less than 4,000 nine years ago in 2000 and, in my humble opinion, anyone who makes comparisons against the 5,000+ Nasdaq peak is just as foolish as those who talk about $850 gold in 1980.

Of course, for anyone who has had money to invest, the more recent history should be much more important than anything from the Reagan administration - say, two years, five years, ten years, or any other similar time span - but, apparently not to Larkin and Munshi who, for some reason, seem fixated on the checking account comparison.
Before today, the metal had risen 32 percent this year, the most since 1979.

Buy-and-hold investors may not have done so well. One dollar put into a U.S. checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 percent to 20 percent. Banks were paying 5 percent on the accounts in January 1981, according to a report in the New York Times.
Wow. A dollar ninety two.

One dollar put into gold in 1983 - when the gold price averaged just over $400 an ounce - would be worth about $2.70 today.

The point being ... dunno.

In fact, the "checking account beats gold comparison" blared in the title only works when the price of gold was over $638 (somebody check my math here) and that only happened on about 40 or 50 days back in 1980.

What a strange, weak argument...

What follows is an odd transformation from gold basher to gold bull, what probably has thousand of readers like myself scratching their heads at this point (as you might have discerned from my commentary above, I was all geared up for more bashing of the basher at this point - right when they turn bullish).
Those who bought gold when it reached a two-decade low of $251.95 in August 1999 have seen a 387 percent return, more than four times the 82 percent gain in Treasuries. An investment in the S&P 500 lost 0.4 percent through the end of last month. Interest on checking accounts shrank to 0.14 percent this year from 0.89 percent in 1999.

Since the S&P 500 peaked in October 2007, investors in the index lost 25 percent, holders of Treasuries made 16 percent and gold buyers are up 64 percent.

“There are people that just stayed in very conservative investments in cash and government bonds,” said Larry Hatheway, global head of asset allocation at UBS AG in London, who recommends investors hold about 1 percent of their assets in bullion. “Surely they would have been a lot better off being in gold.”

Buying bullion at $35 when U.S. President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $2,000 in the next five years, said HSBC’s Morris. Ian Henderson, manager of $5 billion at JPMorgan Chase & Co., said he’s adding to his gold-related holdings because of “the momentum behind it.” Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $2,000 over the next decade.

“Our sense is that this bubble is more at the beginning stages than on the brink of collapse,” said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.

Touradji Capital Management LP, the New York hedge fund founded by Paul Touradji, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest producer, during the third quarter, according to a Nov. 13 filing with regulators. The stake, Touradji’s biggest equity holding, is worth $95 million.

Paulson & Co., the hedge-fund firm run by billionaire Paulson, will start a gold fund on Jan. 1 investing in mining companies and bullion-related derivatives, according to a person familiar with the plan. Einhorn, who runs New York-based Greenlight Capital Inc., told a presentation in New York in October that he’s buying gold to bet against the dollar.

Paul Tudor Jones, in an Oct. 15 letter to clients of his Tudor Investment Corp., said gold is “just an asset that, like everything else in life, has its time and place. And now is that time.”

Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.
They end up noting that gold is a poor inflation hedge and there's no inflation on the horizon right now, so they eventually return to the well-known script that naively excludes the possibility that investors of all stripes are losing confidence in paper money in general.

All in all, after the title - Gold Can't Beat Checking Accounts 30 Years After the Peak - this is one of the more curious gold commentaries that have crossed my computer screen in some time.

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5 comments:

Dan said...

sounds like they're betting both sides

AJ said...

The joys of statistics. I remember reading about how climate-change-deniers like to pick 1998 as an endpoint for all kinds of regression analysis because it distorts the trends in favor of denial.

The only thing I don't like about investing in gold is that it isn't spurring innovation. If I invest money in a company, my money is doing something and producing value. If I invest my money in gold, it doesn't do anything. It's a store of value.

Tim said...

I'm not so sure that buying stocks spurs innovation - at least not in general. I remember many, many years ago when I was buying my first shares, I had this idealized notion that my money was going to the company and they were going to do something useful with it, but, then I came to find out that this really only happens when companies issue new shares or on the smallest of scales with private companies before they go public.

Once a company is listed on an exchange you're not really "investing", you're just trading their stock - buying from someone who wants to sell and giving your money to him, someone who maybe thought he was "investing" in the company too when he bought his shares.

Anonymous said...

Checking/savings accounts spur innovation if the banks loan the funds out to nascent small businesses. That is the way it was supposed to work, and what Keynes meant when he said citizens should buy capital goods with their savings.

What messed this up was constant inflation, which made citizens shun banks in favor of inflation hedges. Inflation hedges in general don't spur innovation.

To spur innovation, get rid of inflation (stop printing). Then citizens will be able to trust banks once again.

Also stop with the subsidized mortgages. This diverts funds from building nascent businesses into building too many McMansions. Since McMansions don't produce anything, the loans can't be repaid. Build small homes that median people can afford without subsidized mortgages instead.

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