May 24, 2022

Nine Reasons Why You Should Absolutely Not Own Gold

As the mainstream press becomes more aware of gold’s decade long advance, the chorus of reasons for not owning gold seems to become louder ever day.   What if the conventional thinkers are correct?  Is gold an over owned and over priced asset that was run up by uninformed investors who are now on the verge of incurring steep losses?

With an open mind, this writer decided to dispassionately review the reasons for NOT owning gold.  I read numerous articles detailing why gold is a bad investment, why it should not have increased in price and why it is certain to disappoint investors.   At the conclusion of my reading exercise, it became obvious that there are, in fact, reasons why gold should be avoided.

I have listed, in no particular order, nine sound reasons for not owning gold.  If you believe that the following events will occur, there is absolutely no reason to own gold, other than perhaps an occasional jewelry purchase.

  1. The Federal Reserve and other central banks worldwide will institute sound money policies that eliminate inflation and maintain the purchasing power of their currencies.
  2. The world economy is on the verge of a golden era of long term, uninterrupted real economic growth.
  3. The risk of default by over indebted nations, businesses and consumers will disappear as the world economy enters a period of high growth.
  4. The return on competing assets such as real estate, bank savings, stocks and bonds will all exceed the return available from holding gold, a non income producing asset.
  5. The rate of inflation will remain minimal.
  6. The benefit of gold’s negative correlation in a portfolio will become unnecessary due to the elimination of black swan events by world governments.
  7. The price of oil and other commodities will remain stable due to abundant and uninterrupted supplies.
  8. The central banks and other large gold holders will liquidate gold positions to redeploy assets into higher return paper assets.
  9. The belief  that gold has intrinsic value, a concept dating from the dawn of human civilization, will gradually disappear as the glow of world prosperity ushers in a new era of  intellectual enlightenment.

K-Ratio Flashing Major Buy Signal For Gold Stocks

Gold Stock Buy Signal

One reliable  indicator that I have followed over the years to time the purchase of gold stocks is the K-Ratio.  At the present time, the K-Ratio is giving a strongly bullish signal.  The K-Ratio is computed by dividing the value of  Barron’s Gold Mining Index (GMI) by the Handy & Harmon gold price.  Using data from the latest issue of Barron’s, the K-Ratio is now at .90 and flashing a very strong buy signal.

The last extremely bullish reading was registered in late October of last year when the K-Ratio recorded an all time low reading.  Since last October gold mining stocks have advanced strongly with the XAU recording a 100% gain from the October bottom to its recent high of 140.

XAU Gold & Silver Index Courtesy StockCharts.com

K-Ratio Forecasting Major Up Move for Gold Stocks

The K-Ratio works best at extreme readings when the GMI is below the price of gold, which is the case now.  The old rule of thumb is that an extreme bullish reading occurs when the K-Ratio is at 1.20 or lower indicating that gold stocks are cheap compared to the price of gold bullion.  In the past,  a sub 1.20  K-Ratio has triggered gold stock advances of over 50% and bullion advances of over 25% within 6 months.

K-Ratio Courtesy:   Kaeppel’s Corner

Some major gold producers that usually perform well in a rising gold market are KGC, GG and GOLD.   I would look for all of these issues to show major gains in line with the performance of the XAU over the next six months.

More On This Topic

Gold, Silver – An Important Alert!
The Gold Direction Indicator is flashing another buy signal.  This indicates that the pull-back that started late February is probably finished.  A new rally is about to start.

Disclosure

Long GG, GOLD, KGC

Is There A Safe Place To Put Your Money?

Stanford Financial, with as much as $50 billion in customer assets,  was accused by the SEC of defrauding its investors.  Where does one put his money today, without worrying that it may not be there tomorrow?

Stanford Lured Clients With ‘No Worry’ Promise on Top of Rates

Feb. 19 (Bloomberg) — Stanford International Bank Ltd., accused by U.S. regulators of defrauding investors, relied on more than high interest payments to sell $8 billion of what it called certificates of deposit.

The Antigua bank, founded by Stanford Group Co. Chairman R. Allen Stanford, attracted clients with assurances that its CDs were as safe as U.S. government-insured accounts, if not safer, investors said.

“Security was the key aspect,” said Pedro, a 62-year-old software engineer in Mexico City who invested $150,000 in CDs issued by Stanford International.

“They told me that they had insurance. The broker told me not to worry and that the bank was safe,” said Pedro, who asked that his last name not be used because he didn’t want to anger bank officials.

Most U.S. certificates of deposit are insured for as much as $250,000 by the Federal Deposit Insurance Corp. CDs issued by Stanford International, a foreign company, aren’t FDIC-protected.

A Stanford International training manual obtained by Bloomberg instructed financial advisers to tell clients that “the FDIC provides relatively weak protection.”

The U.S. Securities and Exchange Commission on Feb. 17 said that Stanford, 58, ran a “massive, ongoing fraud” through his group of companies and lured investors with “improbable if not impossible” claims about investment returns. Stanford Group, Stanford International and Stanford Capital Management LLC were named in the SEC complaint.

Beware The Experts

By the time this financial crisis is resolved, the winners will be those who can keep what they have.   Any investor not doing his investment homework is severely at risk.   I have followed Ray Dalio, chief investment officer of Bridgewater Associates, for years.   Mr Dalio has been warning of an economic crisis due to excessive leverage since early 2007 and in 2008 produced returns of over 8% for his clients.  Definitely someone to pay attention to.  Mr. Dalio recently gave an interview to Barrons and it is well worth the read.

AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.

Dalio: Let’s call it a “D-process,” which is different than a recession, and the only reason that people really don’t understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn’t live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.

Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

I can easily imagine at some point I’m going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won’t go down a whole lot, at first.

Definitely worth considering is that Mr. Dalio’s preferred choice of investments at this point are gold and treasury bonds.

Is Burying Your Cash The Answer?

Fear and loss of confidence in our economic future due to over leverage can be seen in many areas.  There have been many stories lately about individuals attempting to secure their future by burying cash in their backyards.  Those of presumably greater means with the same idea have propelled safe manufacturers into one of the few industries showing sales growth today.

Burying cash is an old idea born of the depression years prior to the FDIC when if a bank went under you lost your money.   Under the current Federal guarantee of bank deposits, the failure of a depositor to be made whole would be equivalent to a default by the Federal Treasury.

Those inclined to burying cash should ponder the baseball card craze of years past.   Baseball card “investors” would fill their garages and basements with boxes of unopened cards and dream of the day when their value would skyrocket.  The card sellers made money but the buyers failed to realize that the cards they were buying as collectibles were being produced in massive quantities, almost guaranteeing little scarcity value in the future.  Paper cards could also be flawlessly produced in quantity by counterfeit card operators.  While individually graded cards merited an investment consideration, holding boxful’s of ordinary cards did not seem wise.

The cash dollars of today are the baseball cards of yesterday.   Dollars can be produced cheaply and in infinite quantities as deemed necessary by the Federal Reserve.  There is a risk of buried cash being lost or stolen.  There is no risk betting that the Government will print as many dollars as necessary should the downward economic spiral continue.  As the Government assumes the massive losses of every more entities via bailouts, those still holding the cards may become the winners (from a value standpoint) over those holding dollars.

My viewpoint is that one asset class deemed worthy of investing in to preserve wealth is gold, as discussed in Gold, Cheap at $5,000?

Gold investors have been laughed at for years and there have been long periods of declines and/or under performance in price versus other asset classes.  Gold, however, is the only monetary asset where the ultimate value of your investment is not subject to someone’s else’s promise or ability to pay.  I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.

A World Of Zero Interest Rates

We have arrived at 0 interest rates and the reasons we are at this point are all negative indicators for where we are and where we are heading.

Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, one of the 17 primary dealers of U.S. government debt, said some investors bought three-month Treasury bills from his firm with negative yields of 0.01% to 0.02% Tuesday. By the end of active trade, the yield had inched back up to positive 0.02%.

In round numbers, the investors were willing to pay $100, knowing they would get $99.99 in return, in the belief that a small but guaranteed loss was preferable to investing in stocks, corporate bonds or other securities. Treasurys have been flirting with 0% yields since the Lehman Brothers bankruptcy nearly three months ago.

“The bond market is doing a much better job than stocks right now of telling you about the risks that are out there,” said Thomas H. Attenberry, a partner at First Pacific Advisors, an investment-management firm in Los Angeles. The high yield investors are demanding on anything other than Treasurys is particularly worrisome because companies need to refinance more than $800 billion worth of debt next year, according to analyst estimates.

The Telegraph.uk.co notes the extraordinary amount of risk aversion taking place as investors loss their confidence in the ability of anyone other than a central bank to repay their debts.

The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.

“It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year,” said Marc Ostwald, a bond expert at Insinger de Beaufort.

The rush for the safety of US Treasury debt is playing havoc with America’s $7 trillion “repo” market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.

“You know the US Treasury will give you your money back, but your bank might not be there,” said Paul Ashworth, US economist for Capital Economics.

The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into “backwardation” for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.

The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.

Credit markets may have thawed somewhat but after suffering horrendous losses on virtually every asset class, investors seem determined to put whatever cash they have left in the most risk free category possible – even if that means paying for the privilege via negative interest rates.

A desire for a return of capital rather than a return on capital, as the old saying goes, is what we are looking at here.  Of course, at some point, the disgust of receiving a zero return on your money is bound to drive at least a portion of the capital now in treasuries into another asset class.  Investors will be willing to risk some of their capital in another asset class which might be riskier but which also promises some good chance of obtaining a return on capital.

My guess is that one such asset class will be gold, as I previously discussed in  Gold, Cheap at $5000?
I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.

Gold, Cheap at $5000?

Although I have been following the gold market for many years, I can’t seem to remember the last time that I have seen so many unanimously bullish articles on the price future of the yellow metal.  Typically in the past, I would note that a bullish article in a major publication or a cover story on a major magazine would coincide with a price peak, rather than a buying opportunity.

Is this time different?  Most of the bullish opinions on gold are based on the actions being taken by the  world’s governments to reflate the economy with oceans of cash and credit.  Let’s take a look at a sampling of some of the recent bullish articles on gold that appeared after the gold shares and the bullion recently rebounded sharply, after a nasty sell off from the price peaks of early 2008.

Will gold protect us from bailout inflation?

As the amount of bailouts and guarantees by the Federal Reserve grow exponentially, worries are mounting over the future inflationary impact of these actions.  Is buying FSAGX the best way to protect your purchasing power?

The role of gold in the world’s monetary history

For those who dismiss the idea of gold as having a continuing role in the world’s monetary system, consider that central banks and the IMF hold 80% of the world’s gold reserves.

Gold could gap up by hundreds of dollars in one day

Gold’s price is artificially low at this point, but fundamental market forces will prevail with huge and sudden price gains.

Low gold lease rates foretell of higher prices

The gold carry trade is now unprofitable resulting in less gold being supplied to the market place at a time of huge physical gold demand.

“gold itself is now free to rise in deflation given its true role as money”

Based on the technical breakouts on the gold stock charts and monetary fundamentals, it looks like a bottom is in for gold here.

Citi anaylst predicts $2000 gold price

As the huge government stimulus efforts work their magic, over time, inflation is expected to rise significantly causing large increases in the gold price

All of the above posts are written by exceptional ananylsts; over time I believe that they will be correct in their bullish assessment of gold – the exact timing of the price increase is not important.   I have been adding to my gold stock and bullion positions over the last fifteen years and will not sell until gold reaches $5,000 or Time Magazine runs a cover story on why everyone should own gold.

Gold investors have been laughed at for years and there have been long periods of declines and/or under performance in price versus other asset classes.  Gold, however, is the only monetary asset where the ultimate value of your investment is not sujbect to someone’s else’s promise or ability to pay.  I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.