Why Gold Is More Than a “Pet Rock”

by Victor Sperandeo with the Curmudgeon

Victor's Critical Analysis of Jason Zweig’s WSJ article: “Gold Remains A Pet Rock"

Editor's Note: The Jason Zweig article was published in last weekend's (July 9-10, 2016) Wall Street Journal (WSJ). 

The purpose of this critical review is not to promote gold, but rather to portray the bias, misleading, and misrepresented facts that have unfortunately become an epidemic in the press over the last 10 years. The distorted reporting by Jason Zweig, a well-known reporter for the esteemed Wall Street Journal, shows that "honest reporting" is a dinosaur (except for the Curmudgeon blog posts!).

First, Mr. Zweig made a bearish call on Gold one year ago (July 17, 2015) in a WSJ article and blog post. As gold has rallied strongly this year, Zweig now referred to himself as a "moron."  I respect him for that, as human beings are not infallible and making a mistake is normal.

Yet Zweig again compared gold to a "pet rock!" For this I will use the terms dumb and unintelligent for him.            

If you go to a park with hills you will find many rocks, but no gold.  One would need to discover gold, recover a sample and spend a great deal of money on geologists doing so.  To mine the gold one has to hire miners, trucks, workers, assayers, buy machinery, get licenses from government bureaucrats, and incur many other costs and risks.

-->To suggest all that effort is a similar "value proposition" to picking up a rock is totally absurd! 

First and foremost, “Gold is money; Everything else is just credit," said JP Morgan.









Gold has been valued for approximately 6,000 years.  Gold treasures have been found dating back to as early as 4000 BCE in a burial site in Varna, Bulgaria (from the ancient Thracian civilization).


Let's now examine some of Zweig's statements about gold (with my assessment in parenthesis):

·       "Gold is insurance against chaos." (True)

·       "Gold also has preserved its purchasing power over remarkably long periods.  (Also true).

·       "While gold is a reliable store of value over extremely long periods, most investors don't lock up their money for a couple thousand years at a time. (More than true).

·       "In the shorter term, gold fluctuates so wildly that it is a surprisingly poor hedge against increases in the cost of living." (Sometimes true).

·       "From its peak of more than $800, as inflation raged in 1980 gold fell relentlessly over the next two decades even as the cost of living continued to rise."(Not True! The misrepresentation of this statement is a biased fabrication).                  

Gold acted true to form as GDP increased and inflation fell from 1982-1999. Inflation always increases (without a gold standard) at some amount, over a two-year period, but it is the "slope or trend" of the increase that counts, not the nominal amount. 

Some context:  In 1970 gold was officially priced at $35 an oz., but gold closed the year in London at $38.90. In August 1971, President Richard Nixon went off the international gold standard and gold closed the year at $44.60.  Gold was re-priced by the US government to $38 in 1972. However, gold closed at $63.84 in 1972 and was then again repriced at $42.22 in 1973 (where it remains today), but closed the year at $106.48.  In continued yearly movements upward, gold closed at $594.9 in 1980, with only two declining years of (-24,2%) in 1975 and (-3.96%) in 1976.

Gold compounded at a 31.36% per year rate from the end of 1970-to-1980 or 10 years. Nothing I can find in all of history compounds at over 30% for 10 years!  Critically, in 1980 gold went up "not" because of inflation, but because the USSR invaded Afghanistan on December 24th 1979.


Sidebar: Gold Price History in 1980:  

Gold closed above $800 officially for TWO DAYS in January 1980.  The high was $873 and the close was $834 on 1/21/80.

·       On 1/22/80 gold futures closed down the limit ($50) at $784.

·       On 1/23/80 at $734.

·       On 1/24/80 gold closed at $684.

·       By 3/27/80 gold closed at $463! 


Zweig further claims that “Adjusted for inflation gold remains 35% below the 1980 peak." Thereby, a two-day event in 1980 is what Zweig sets as a standard to create the misrepresentation that gold is not doing its supposed job as a hedge against inflation and geopolitical chaos?

-->To use gold's artificial 1980 high (based on a surprise Russian invasion of Afghanistan) along with misleading facts and context is not a service to Zweig's readers!

Let's attempt to objectively examine gold to see if Zweig is biased or dumb.  The way to fairly view the inflation rate versus a gold is to set a standard of using the "average price" for the year, which was $615 in 1980.

Source:  Historical Gold Prices-1833 to Present.

The official US government CPI data from 1913- to date (from InflationData.com) shows the CPI on 12/31/80 was 86.3 and 225.889 in September 2011.  That's a compounded rate of increase of 2.94%.

To keep up with inflation (US CPI) gold should have been priced at $1616.36 on September 2011.  Here's the reality since then:

·       On September 6th 2011, Kitco reported that spot gold traded at a high of $1923.70 and closed at $1895.

·       The average price of gold for 2011 was $1571.52 or a mere -2.77% less than gold should have been mathematically to keep up with the CPI from 1980.

·       Gold closed at $1664 at the end of 2012 while the CPI was +1.74% that year. The 2012 CPI increase adds $28 to $1616.36 or ~ $1634 for a year end 2012 value which gold exceeded!  In other words, gold actually outperformed inflation by 1.19% from 1980 through the end of 2012.

·       Yes, gold made a nominal new high in September 2011, but gold was also still up in 2012. 

·       Gold went down in 2013 and was in a bear market till 12/3/15. Therefore, it is somewhat below the CPI from 1980 to currently.

·       However, this is a new (bullish) cycle for gold.  So it remains to be seen whether gold goes above $1923 in the current gold bull market.  I believe it will!

Zweig goes on to say "Gold is a partial, not a perfect, hedge against chaos."  Really? What a profound discovery!  Further, he explains this non-perfect hedge in action using 2008 as an example year:

"In October 2008, for instance US stocks fell 16.8%, corporate bonds lost 4.5%, and gold dropped 18.5%."

Reality for the 2008 year end: Stocks were down (-37%), Corporate bonds +8.78%, gold + 3.97%.

-->It should be noted that gold will be sold along with most assets in a deflationary panic.

More context: Gold went up in a straight line annually starting in 2001. It earned 203.4% over the next seven years, or 17.18% compounded annually.  In fact, gold up slightly in 2008, increased every year from 2001 through 2012.

–> That's a 12-year win streak for a total return of 501.81%, and or a compounded return of 16.16%!

Zweig's closing comment is a classic:

"The future always can be different from the past. But if gold shoots far up from here, it won't be following the precedents of the past. It will be violating them. So am I a moron? On many things, yes. On gold, I don't think so."

Sadly, Mr. Zweig you are!  [The Curmudgeon agrees with Victor].                                  

He makes the incredible claim that if gold goes up with millions of investors, traders, money managers and many governments involved in buying it, they are wrong, and he is right?  That's megalomania taken to a whole new level!                               

As Karl Popper (a favorite philosopher of George Soros) once said:  "Denying realism amounts to megalomania." 

Curmudgeon's Market Comments:

In 54 years of watching financial markets, I have never seen such a mania in global government bonds (especially the $10T in negative yields, BoJ buying perpetual JGBs, and 30 year US T bond yielding < ½ of its pre-financial crisis all time low yields). 

The bubble trouble is almost as bad in US stocks (i.e. Dow, S&P 500, Russell 2000) when compared to their recent earnings and subdued growth prospects.  The recent market melt-up comes after a 7+ year old bull market with five consecutive year over year down quarters in corporate earnings. 

But earnings don't matter anymore with central banks determining stock prices…or history been repealed because this time it's different?

Nonetheless, we respect July's (post Brexit) bullish technical market action, as chronicled by Investech's Jim Stack (subscription only).  He notes the Advance-Decline Line hitting new highs (cumulative A/D chart shown in July 4th Curmudgeon post), two breadth thrusts, and a volume thrust.  

“The first breadth thrust1 reached a reading of 2.2, which is significant as there have only been six readings of 2.2 or greater in the current bull market, all occurring in 2009 after the market low.”

Note 1.  The late Martin Zweig developed this momentum indicator that illustrates a thrust when, during a 10-day period, the average number of issues that are advancing goes from below 40% to above 61.5%. 

“On July 8th, two days before the breadth thrust was registered, a volume thrust was recorded, with upside volume (volume in stocks closing higher on the day) exceeding downside volume (volume in stocks closing lower on the day) by a ratio of 19:1. In itself this is a bullish signal, as such one-sided volume is often seen at the start of new bull market legs.” 

“The combination of a breadth and a volume thrust of these magnitudes in the same week has only occurred twice since 1950 –in 1982 and 2009– both at the start of long-lived bull markets.”  

-->Does that imply this very old bull has many years left?

Rather than provide my own assessment of that, I leave the reader with quotes from others who are well paid for their market opinions:

1.  Credit Suisse’s Lori Calvasina is warning clients that the S&P 500 has hit a “post tech bubble peak” on a next 12 months P/E basis:

“Given the rally in US equities seen so far in July, we have refreshed our various valuations models for the July 13th close,” Calvasina noted. “The most dramatic change is that our S&P 500 model is back in worrisome territory, at 1.57 standard deviations above its +30-year average.”

This is troublesome, Calvasina notes, because history is not on the side of the longs.  “The S&P 500 has been down 58% of the time on a 12-month forward basis from these levels, and in our opinion, expensive valuations will continue to keep US equities vulnerable to bad news in the back half of the year,” she said.

2.  Bill Strazzullo, chief market strategist at Bell Curve Trading, told the AP that he thinks the recent stock market gains have more to do with easy money policies by central banks in the US, Europe and Japan than any improvement in fundamentals.

"The market isn't really trading on economic growth and earnings. It's being propped up by wildly accommodative monetary policy.  The music will eventually stop and stock markets around the world will fall significantly."

3.  Alan Newman in an email to Crosscurrent subscribers wrote:

“Huge on balance volume divergences continue to show a considerable contraction in the market's internal dynamics.  Also of note, the non-confirmation of the Dow Transports, 14.2% below their November 2014 peak.  Wow.  Stunning.   The weekly advance/decline numbers are far more reliable that the dailies and as you can see, despite the huge run for the roses, there is still a significant divergence.  We are now leaning to the view that this divergence is as significant as at the peak in 2007.”

Good luck and till next time...

The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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