Swedroe: 12 Gold Bug Commandments

August 14, 2015

Used alone, the word “cult” often has a religious connotation. And one could describe a “cult following” as a small group of very devoted fans.

I believe the term is appropriate when used in reference to a certain group of investors constantly touting gold as a great investment, one that’s primed to soar in value regardless of the economic and political environment.

Recently, I wrote about the predictions of one market “guru,” Peter Schiff, who might be described as a leader of the cult of gold bugs. I also reviewed the accuracy of some of his gold-related forecasts. Schiff clearly seems to be an advocate of the metal, and his predictions often focus on gold prices.

A reader of that article sent me a note alerting me to another piece on the subject of gold bugs that he thought I would find of interest. The piece—which was authored by Barry Ritholtz, chief investment officer at Ritholtz Wealth Management, creator and host of Bloomberg’s “Masters in Business” podcast and a featured columnist at the Washington Post—is titled: “12 (Misguided) Commandments of Gold Bugs.”

Actually 13 Commandments
You’ll notice that there are actually 13 “commandments,” because Barry kindly throws in a bonus rule. With Barry’s permission, here’s his (slightly edited) list. I hope you find it as insightful and entertaining as I did.

  1. Gold is a Currency: This is rule No. 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.
  2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of central bankers and politicians. It’s a conspiracy, and we know who the guilty parties are.
  3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior rule of gold manipulation. Gold runs up despite the overwhelming opposition to it.
  4. The world MUST return to the gold standard one day: It is inevitable that we will return to a gold standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a gold standard, we can derive prices of gold in the $7,000, $10,000 or even $15,000 range. Hence, we know it’s cheap even at $2,000.
  5. Central bankers are printing money relentlessly, and this can only drive gold prices higher: NOTE: You must ignore, for the moment, that gold had not gone higher for the two years prior to April 2013 (when Barry originally penned this list), as central banks around the world ramped up quantitative easing. This only means that, ultimately, gold will go much, much higher.
  6. Gold works whether the economy is good or bad: When we have a red-hot economy, gold is your hedge against inflation. When we have a bad economy, gold is a safe harbor against collapse. It is a one-way trade that never fails!
  7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles down around you. Get yourself some gold coins and a Glock, and you will be just fine when the whole world goes to pot. We welcome the era envisioned in the movie “Mad Max.”
  8. Never admit that gold is essentially a sucker’s bet: Never discuss how, in the last century, gold has run up only to be trounced in repeated massive sell-offs. Always blame rule No. 2 for this. Do not discuss how this has happened in 1915-1920, 1941, 1947, 1951-1966, 1974-1976 1981, 1983-1985, 1987-2000 and 2008.
  9. Gold is a rejection of government, and its control of fiat money and finance: There are no printing presses that produce gold. It is finite, natural and God-created. How much we can scrape out of the ground each year is limited, and is the only variable to the old equation. Just ignore man’s natural tendency to organize into city-states over the past 12,000 years.
  10. All gold discussions must contain ominous macro forecasts: Your description of why gold is going higher must consist of spurious correlations, unprovable predictions and a guarded expectation of bad things in the future. Avoid empirical data at all costs.
  11. Gold is always rallying in one currency or another: Sure, gold may be down 30 percent in dollars, the reserve currency it’s priced in, but you can always find a currency falling faster than the dollar and claim you own gold in that denomination. Last week, it was up in Japanese yen. This week, it is up in Zimbabwe dollars.
  12. China and India know the value of gold; the Western world does not: The massive buying of gold by consumers in China and India reflects the culture, intelligence and investing savvy of the people in those countries. The West doesn’t get it, and it is its loss.

Bonus rule: Never admit gold might be falling, because it trades on human emotions and psychology and has no intrinsic value whatsoever.

If you’re considering an investment in gold, I would suggest you take a closer look at some commonly held beliefs about the precious metal.

The conventional wisdom, as it turns out, can be shockingly wrong. My recent article on gold’s actual performance as an inflation hedge, a currency hedge and a safe haven should provide some insights that will be helpful in making your decision.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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