FT's John Dizard concedes grudgingly to gold and even cites GATA

Section:

7:15p ET Sunday, May 8, 2011

Dear Friend of GATA and Gold:

Financial Times columnist John Dizard, who long has been pretty disparaging about gold, today gives it some grudging respect and even seems to concede that it's the right asset for the time being, even if, at the end of his column, he can't help trying to trump gold with the apocalypse -- as if the apocalypse won't trump every asset class. Further, Dizard remarkably not only makes reference to the seminal academic study by economics professors Lawrence Summers and Robert Barsky in the June 1988 issue of the Journal of Political Economy, "Gibson's Paradox and the Gold Standard," of which GATA long has made much, but he even links to the copy of the study that is posted at GATA's Internet site.

Dizard gets the date of the study wrong -- it was 1988, not 1985 -- and he misidentifies Barsky as a Harvard professor when he was in fact a professor at the University of Michigan, but these are small details. It's hard to be too sore at a guy in the financial press who at least is paying this much attention.

Dizard's column, headlined "Reasons Not to Fondle Your Gold," is appended.

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

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Reasons Not to Fondle Your Gold

By John Dizard
Financial Times, London
Sunday, May 8, 2011

http://www.ft.com/cms/s/0/988fe886-782c-11e0-b90e-00144feabdc0,dwp_uuid=...

"No man is poor who can do what he likes to do once in a while! And I like to dive around in my money like a porpoise! And burrow through it like a gopher! And toss it up and let it hit me on the head!" -- Scrooge McDuck.

There's been a lot of news about precious metals prices lately, given the reports of the dramatic fall in the price of silver and the somewhat less dramatic fall in the price of gold. A lot of news, but not much information, since the price of precious metals in the various currencies, particularly the dollar, is really following market events rather than creating them.

Silver and gold were not "overbought." You could more accurately say that the major currencies were "oversold." Too many people were prepared to believe that governments and central banks in the US, Japan, and Europe, were about to completely lose control of their economic destinies and financial systems. Or they were prepared to believe it a bit too early.

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

http://sonaresources.com/_resources/news/SONA_NR19_2010.pdf



And while the longer term (or "secular") bull market in the metals, or bear market in the currencies, will probably resume, we can already see that this one will end as the previous ones have, with a significant, sustained increase in real interest rates.

The problem that gold enthusiasts have, in the end, is that they are correct: Gold is "real" money. As currencies have declined with the credibility of central banks and governments, gold's "moneyness" has become ever more important, relative to its value as a commodity.

Real money, un-invested in any enterprise or security, does not earn any return. That is true if it is in the form of precious metal or hard currency.

Warren Buffett made this point in an accurate, if rambling, answer to a shareholder question at the Berkshire Hathaway annual meeting a couple of weeks ago. If you owned all $7,000 billion of gold in the world, he pointed out, you could climb on top of it, "fondle" it, and declare yourself king, but you couldn't earn anything on it.

For that price, Mr Buffett said, you could own all the farmland in the United States, several ExxonMobils, and a lot of other earning assets. He prefers that "stuff."

A more systematic answer to the value of gold relative to earning assets was offered in 1985 by two Harvard economists, Larry Summers and Robert Barsky, in a paper called "Gibson's Paradox and the Gold Standard":

http://www.gata.org/files/gibson.pdf

To brutally summarise their conclusion in a single quote, the two found "Strong co-movement between the inverse relative price of gold (and other metals) on the one hand, and the real interest rate on the other. ... " If real rates on bonds, or equities, are high, holders of money have more incentive to use their cash to buy assets.

Messrs. Summers and Barsky were developing a theory to explain, in their words, "price levels and interest rates over long periods of economic history," not to be used as the basis for trading tactics.

However, the Summers-Barsky model can be reasonably incorporated into a multi-year investment strategy. When real returns are high, the fiat-currency price of gold will stagnate or decline. When real returns have been low or stagnant, as they have been during the past decade, the gold price has been strong.

In the past three years, as one rescue operation or monetary stimulus has followed another, the S&P 500 cumulative total return has been less than half of 1 per cent, while the dollar gold price has increased by more than 78 per cent.

Right now, thanks to the profligacy of central banks, real interest rates are negative. So why buy the two-year Treasury, let alone T-bills, rather than gold? Conservative capital preservation strategies are now ensuring only capital destruction.

The most recent run in gold coincided with the Federal Reserve's QE2 monetary expansion since the Jackson Hole summit in August. Its recent weakness has followed chairman Ben Bernanke's confirmation that QE2 will end on schedule this summer.

Cheap money, expensive gold; expensive money, cheap gold.

I have my doubts that this moment is comparable to the late conversion of the Carter administration and the Volcker Fed to a strong dollar and tight money.

This administration and this Fed are, respectively, not that desperate and not that principled.

So this gold (and silver) price correction will be followed by a resumption of the secular bull market.

There is another issue with being too dogmatic about gold. Yes, the goldbugs are right: Governments are degenerating, and their paper/electronic money is losing value.

But what if the political and social order completely collapse, as many of them expect? Who's going to protect their piles of gold? Without that oppressive and intrusive nanny state, those can be taken by someone with a $600 Kalashnikov.

Even with the present price weakness, gold-as-real-money is a useful capital preserver. Over the decades, though, staying in cash rather than earning assets is as pointless as Scrooge McDuck's money bin.

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Wall Street Journal Publishes Lewis Lehrman's Call for the Gold Standard

In its April 26 edition The Wall Street Journal published an important essay by the Lehrman Institute's chairman, Lewis E. Lehrman, explaining why a gold-convertible dollar is critical to eliminating the shocking federal deficit.

"Experience and the operations of the Federal Reserve System compel me to predict that U.S. Rep. Paul Ryan's heroic efforts to balance the budget by 2015 without raising taxes will not end in success -- even with a Republican majority in both Houses and a Republican president in 2012. ...

"What persistent debtor could resist permanent credit financing? For a government, an individual, or an enterprise, 'a deficit without tears' leads to the corrupt euphoria of limitless spending. For example, with new credit the Fed will have bought $600 billion of U.S. Treasuries between November 2010 and June 2011, a rate of purchase that approximates the annualized budget deficit. Commodity, equity, and emerging-market inflation are only a few of the volatile consequences of this Fed credit policy."

To read more, and to sign up for The Gold Standard Now's free, noncommercial, weekly report, "Prosperity through Gold," please visit:

http://www.thegoldstandardnow.org/gata