Brett Arends: Why I don't trust gold

Section:

9:35p ET Wednesday, May 26, 2010

Dear Friend of GATA and Gold:

Appended here is today's GATA failure -- the failure to reach Brett Arends of The Wall Street Journal, who, despite all GATA's clamoring about unbacked paper gold, the vast inflation of the world's imaginary gold supply -- can still write, in an essay headlined "Why I Don't Trust Gold," about supply exceeding demand and can repeat the cliche about gold being dug out of one hole only to be buried in another, as if for many decades gold was not a real, circulating, transactional currency and as if it is not being restored as such today by computerized and Internet-connected vaulting operations like GoldMoney. With Arends' logic one could sneer just as well at ordinary government currencies -- that they get typed into one central bank or commercial bank computer system only to be buried in the computer system of another central bank or commercial bank.

Oh, well. If you run into Arends, urge him to press the International Monetary Fund for the exact location of the supposed gold it is always threatening or claiming to sell, or to press the Federal Reserve for access to its gold swap agreements with foreign banks and for an explanation of the purposes of those swaps. Then maybe he'll be in a position to write another essay, which he might title "Why I Don't Trust Central Banks."

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Why I Don't Trust Gold

By Brett Arends
The Wall Street Journal
Thursday, May 27, 2010

http://online.wsj.com/article/SB1000142405274870403270457526846247768976...

This is a very sad day for me.

In Part I of this series, when I argued that gold might be about to go vertical, I made a whole bunch of new friends among the gold bugs.

And now I'm going to lose them all.

That's because even though I think gold might be about to take off, I don't recommend you rush out and put all your money into gold bars or exchange-traded funds that hold bullion.

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous.

... Dispatch continues below ...



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Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

And that's not the half of it.

Gold is volatile. It's hard to value. It generates no income.

Yes, it's a "hard asset," but so are lots of other things -- like land, bags of rice, even bottled water.

It's a currency "substitute" but it's useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking "facility" still trying to settle their debts with cigarettes. That's gold. It doesn't make sense.

As for being a "store of value," anyone who bought gold in the late 1970s and held on lost nearly all their purchasing power over the next 20 years.

I get worried when I see people plunging heavily into gold at $1,200 an ounce. What if the price goes back to where it was just a few years ago, at $500 or $600 an ounce? Will you buy more? Sell?

My concerns about gold go even further than that.

Let's step inside the gold market for a moment.

Everyone knows the price has risen about fivefold in the past decade. But this is not due to some mystical truth or magical act of levitation. It is simply because there have been more buyers than sellers.

Banal, but true -- and sometimes worth repeating.

If the price rises you'd think there must be a shortage. But data provided by the World Gold Council, an industry body, tell a remarkable story.

Over that period the world has produced -- or, more accurately, recovered -- far more gold than anyone actually wanted to use. Since 2002, for example, total demand for gold from goldsmiths and jewelers, and dentists, and general industry, has come to about 22,500 tonnes.

But during the same period, more than 29,000 tonnes has come on to the market.

The surplus alone is enough to produce about 220 million 1-ounce gold American Buffalo coins. That's in eight years.

Most of the new supply has come from mine production. Some, though a dwindling amount, has come from central banks. And a growing amount has come from recycling -- old jewelry and the like being melted down for scrap. (This is a perennial issue with gold. I never understand why the fans think gold's incredible durability -- it doesn't waste or corrode -- is bullish for the market. It's bearish.) So if supply has consistently exceeded user demand, how come the price of gold has still been rising?

In a word, hoarding.

Gold investors, or hoarders, have made up all the difference. They are the only reason total "demand" has exceeded supply.

Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on.

What do we call an investment scheme where current members' returns depend entirely on new money brought in by new members?

A Ponzi scheme.

Yes, as I wrote earlier, gold may well be the next big bubble. And that may mean there is big money to be made in speculation.

But I don't trust it as an investment.

How can you square this golden circle? I'll tell you in Part III.


* * *

Join GATA here:

World Resource Investment Conference
Sunday and Monday, June 6 and 7, 2010
Vancouver Convention Centre
Vancouver, British Columbia, Canada
http://www.cambridgehouse.ca/index.php/world-resource-investment-confere...

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