The Cons of Investing in Gold

Has the Financial Reckoning Day Arrived?
August 17, 2007

“Even traditional havens such as gold are deemed too risky in this climate.”
— Martin Slaney, GFT Global Markets

The Old Testament recounts how, in 600 B.C. Babylon, one ounce of gold bought 350 loaves of bread. As of today, one ounce will still buy 350 loaves of bread in the United States.

Yet despite the sudden worldwide aversion to all things “risky,” investors seem to prefer U.S. government promises (bonds) in place of gold.

To some, this makes little long-term sense. The dollar has consistently moved in one direction over the past 60-plus years. A 1940s dollar is only worth roughly five cents today.

Regardless, the global economy still depends on the fact that the dollar acts as the standard world currency. And the United States Mint, exclusive to what any other truly sovereign nation may deem prudent, has the right to print as many dollars as the United States deems fit.

We print a currency backed by only the worldwide confidence in our economy, its resources and our innate ability to successfully manage the subtle intricacies of Keynesian economics.

Perhaps, one day, the world will call our bluff. As I pointed out a few weeks ago, American lawyer, lecturer and author Rene A. Wormser once wrote: “No government can operate with a monetary system consisting only of fiat money without sustaining gross economic turmoil and eventually facing a tragic day of reckoning. A fiat money system prompts legislative profligacy and inevitably produces inflation.”

So if traditional havens such as gold are deemed “too risky” in this climate, where do we turn?

I’m not so sure. But I am sure of one thing: You would be hard pressed to find another group of financial analysts more attuned to the heavenly virtue of hard money than the motley crew here at Agora Financial.

By hard money, I mean gold. J.P. Morgan once said: “Gold is money, and nothing else.” And he should know.

Morgan saved the government from financial distress on more than one occasion. For instance, he loaned money to help finance the Western Indian Wars in 1877. He stepped in once again in the 1890s by orchestrating a deal to purchase $65 million in gold after federal reserves became dangerously low. 

He went on to form J.P. Morgan and Co. in 1895, and investment bank, which held significant stakes in a majority of American businesses. Morgan & Company held control in numerous railroads, steel companies and blue chip firms like General Electric and AT&T. By 1912, the investment-banking house held assets whose aggregate value was compared to all the property in the then-22 states west of the Mississippi River.

Even though Morgan saved the American government on more than one occasion, his remarkable influence on American business had Congress scared. They feared that one individual held more concentrated power than the entire American government.

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President Theodore Roosevelt quickly summoned Morgan to testify before Congress. Louisiana Representative Arsene Pujo, chairman of the House Banking and Currency Committee, led the interrogation that deemed Morgan guilty of holding too much influcence over the nation’s financies. They forced J.P. Morgan & Co. to decentralize.

The hearings led to the foundation of the Federal Reserve in 1913, giving birth to America’s financial printing press. Since then, we’ve shunned gold for paper. Since then, we’ve spent more than we’ve earned. Since then, we’ve dilluted the value of the dollar.

As we said earlier, a 1940s dollar is only worth roughly five cents today.

I do believe we’re in an era of silent inflation. Many analysts would have you believe that gold is the only answer.

It’s true, however, that one of the best — if not the best — way to protect your wealth from the nasty ravages of inflation is gold.

But gold has some drawbacks. Let’s take a cue from Barton Biggs. As an investment, Biggs has shunned gold for some very sound reasons. He cites the negative yield associated with storing the actual metal. He also points out that gold does not enhance the purchasing power of its owners.

He deems gold to be apocalypse insurance, not much more. I tend to agree. And I don’t believe we’re anywhere near an apocalypse.

There is still a tremendous amount of liquidity chasing deployment. According to The Economist, the top sovereign wealth funds combined will control $2.5 trillion by the end of this year alone (in contrast, hedge funds are thought to have a mere $1.6 trillion). And assuming forex coffers keep growing at this remarkable pace, the amount could balloon to $12 trillion by 2015.

Consequently, we firmly believe the era of asset appreciation, especially in the arena of international equities, will maintain a very, very bright future.

It never hurts to own some gold…but I wouldn’t start stocking the cinderblock bunker if I were you…not yet, at least.

Until Next Time,
Christopher Hancock

P.S.: Whether you’re buying gold or stocks and bonds, free markets are historically the best place to invest in any of them. And investments that can capitalize on a free market environment will rise fastest and farthest. It's been said time and time again: Money flows where it is treated best.

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