Why we hold on to our gold

Feb 20, 2013

Baltimore, Maryland

Stocks up another 53 points on the Dow yesterday. Gold down another $5.

The Dow is still below its 2007 peak; gold still above $1,600.

I'll come back to this in a minute. First...

Even a seasoned traveler can make remarkably dumb mistakes. That's why we are writing to you from Baltimore rather than from Beijing. For the second time in a single week, we got to Dulles Airport yesterday and discovered that we lacked the proper visa for travel to China. We had forgotten that you need a visa at all.

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You don't always go where you intend to go, but you always end up where you ought to be. Why ought we to be in Baltimore? We don't know. But here we are.

Even seasoned investors make mistakes too. And now, they seem to be selling gold. Yes, dear reader, our favorite metal is taking a beating. Gold dropped below $1,600 intraday, on Monday. The best investors are said to be abandoning their yellow metal for more "productive" positions. Here's Bloomberg:

    Billionaire investors George Soros and Louis Moore Bacon cut their stakes in exchange-traded products backed by gold last quarter as futures dropped the most in more than eight years. John Paulson maintained his holding.

    The fourth-quarter decisions by Soros and Bacon may bolster speculation that gold's 12-year bull-run is coming to an end as economic data from the U.S. to China show signs of recovery, curbing haven demand. Soros Fund Management LLC reduced its investment in the SPDR Gold Trust, the biggest fund backed by the metal, by 55 percent to 600,000 shares as of Dec. 31 from three months earlier, a U.S. Securities and Exchange Commission filing showed yesterday. Bacon's Moore Capital Management LP sold its entire stake in the SPDR fund and lowered holdings in the Sprott Physical Gold Trust. Paulson & Co., the largest investor in SPDR, kept its stake at 21.8 million shares.

    Gold fell below $1,600 an ounce today for the first time since August. Futures for April delivery slumped 1.8 percent to $1,605.40 at 10:49 a.m. on the Comex in New York, after touching $1,596.70, the lowest since Aug. 15. The most-active contract, which has lost 4.3 percent this year, declined 5.5 percent in the final three months of 2012, the biggest quarterly decline since June 2004.

    Growth will accelerate in the U.S. and China, the two largest economies, in the coming quarters, according to more than 100 economists surveyed by Bloomberg. In the U.S., claims for jobless benefits dropped 27,000 to 341,000 in the week to Feb. 9, fewer than any of the 49 economists surveyed by Bloomberg projected, the Labor Department said yesterday.

"The economy is looking better, and people are moving to more remunerative assets like equities," Paul Dietrich, chief executive officer of Foxhall Capital Management Inc., said in a telephone interview from Alexandria, Virginia. "A lot of people have lightened up on gold."

The Financial Times adds this:

    Gold sinks through $1,600 on recovery hopes

    Gold prices tumbled...for the first time in six months as investors turned to other assets amid hopes of an economic recovery.

Recovery? Europe, America and Japan are all (according to the most recent quarterly results) shrinking, not growing. What kind of a recovery is this?

Nevertheless, mainstream opinion believes this is no time to cower in the safety of cash...or gold. Take chances. Buy stocks! Look at Buffett. He's teamed up with a Brazilian tycoon; they're paying $28 billion for a catsup company.

Well, what do you think? Are they right?

Why would you ever want to hold gold, anyway? It is dumb and lifeless. It issues no upbeat press releases. It never 'beats analysts' estimates' on quarterly earnings. It doesn't come out with a slick new handheld device...or announce a major acquisition.

None of the good news you hope to get from an investment ever comes from gold. No matter how much you own, it doesn't seem to care about you; it makes no effort whatever to increase shareholder value.

Instead, it just sits there...like an old umbrella next to the front door, only useful when it rains. War? Gold goes up. Market crash? Gold goes up. Inflation? Gold goes up.

End of the world? Who knows, maybe gold would go up.

So, you decide. What's ahead? Good news? Or bad news? Will the 100 leading economists be right...or wrong? Fair weather...or foul?

It's impossible to say. So, we hedge our bets. We own some real investments - stocks, bonds, real estate - and hope the 100 leading economists know what they are talking about. And we hold onto our gold too...in case they turn out to be the numbskulls they usually are.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Why we hold on to our gold"

bimal das

Feb 23, 2013

A thoughtful observation. A good analysis.


Arvind Bhome

Feb 20, 2013

Dear Mr Bonner,
I had thought you were not like many Americans who think they don't need visa to any country- including India and China- because indeed they don't need visa for many countries most of them travel to!
Anyway coming to investing in Gold and exiting stocks & forgetting the economists who hope for growth in G7 would you then justify the Indian's obsession to buy gold even to the extent of creating a balance of payment situation for the national exchequer?

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