Gold is not an investment. Sounds strange, doesn’t it? This is a topic that’s near and dear to Another Joe. Perhaps there are few who understand the difference between national currency systems and real money any better than Brian Hunt, editor in chief of Stansberry & Associates Investment Research. You might remember our discussion about money and the implications of our system. Brian comes at it from a different angle, but with just as much truth. I’d encourage you to read his statements here carefully.
Of course, Another Joe likes silver better than gold right now, for many reasons. But gold is certainly easier to store and transport. This interview was conducted by folks at The Daily Crux.
What you don’t know about gold:
The biggest myths on the gold market
The Daily Crux: Brian, as you know, we probably get more questions and reader feedback on gold than on any other subject here at The Daily Crux… And we’ve noticed there are several myths and misconceptions about gold out there. Can you go over some of the big ones for us?
Brian Hunt: Sure. Probably the biggest misconception investors have toward gold is they see it as an investment.
They’ll listen to the folks on CNBC pick apart and analyze every $30 move in the metal, just as a move in crude oil or stocks or bonds would be analyzed. They’ll check the price quote every day… to see how their “investment” in gold is performing.
This just isn’t the way to view gold.
Gold isn’t an investment. A thousand shares of health care company Johnson & Johnson is an investment. J&J pays a dividend. It’s a business that’s going to grow its cash flows and pay a portion of those cash flows out to its shareholders.
An income-producing rental property is an investment. Bought at the right price, a rental property will return all of your original capital in the form of rent checks… and the rest is gravy.
Gold isn’t like those two examples at all. Gold is money.
It’s been used for money for thousands of years because it’s easily divisible, it’s easily transportable, it has intrinsic value, it’s durable, and its form is consistent around the world. And as Doug Casey reminds us, it’s a good form of money because governments can’t print it up on a whim. You can’t “Bernanke your way to wealth” with gold.
Gold doesn’t pay interest or a dividend. It doesn’t have profit margins. Your gold holdings amount to lumps of metal held in storage.
The sooner the investor realizes that gold is money – and not a conventional investment – the better off he’ll be. It’s just a timeless form of money. That’s it.
Crux: People can also view it as insurance, right?
Hunt: Right. Since gold is real wealth that you can hold in your hand, it’s also “crisis insurance”… or “wealth insurance.” Like regular insurance, you buy gold and hope you don’t have to use it.
Gold is insurance against governments doing foolish things with their finances. It’s going to hold its value if governments do crazy things that lower the value of their paper money, like the United States is doing with the dollar.
A currency is sort of like the share price of a country. Over time, if a country manages its finances well – if it produces more than it consumes, saves plenty of money, and maintains a modest amount of debt – its currency will rise. If a country consumes more than it produces – if it spends lots of money, and borrows a lot in order to cover that spending – its currency will fall in value.
While currencies fluctuate for all sorts of reasons in the short term, over the long term, countries that manage their checkbooks will enjoy strong currencies. Countries that mismanage their checkbooks see their currencies plummet.
The U.S. dollar has lost around 33% of its value in the past 10 years. This decline is because the world is waking up to the awful situation America has borrowed and spent its way into. Meanwhile, gold has climbed from $300 per ounce to close to over $1,750 an ounce right now.
My friend Porter Stansberry calls our current dollar situation a full-blown crisis. He’s probably right. Gold is surging as a result of this crisis. It’s demonstrating its value as crisis insurance.
I wish I lived in a country that produces more than it consumes… that values personal responsibility and saving money… that has a government that believes in fiscal responsibility. But I don’t.
About half the country is on the government dole, in some form or another. Over 40 million people are on food stamps. People are being paid by the government not to work. The people employed by the government enjoy huge, outsized salaries for what they do.
This situation is a crisis. That’s why I own gold… and recommend people keep at least 5% or 10% of their wealth in gold.
But here’s where I differ from the average gold owner: I’d love to see gold fall down to $300 or $400 per ounce. I’d love it if the value of my crisis insurance would fall, rather than skyrocket… just like I don’t want my family’s house to burn down… or why I don’t want someone to T-bone my car in an intersection.
But I look at the gang of clueless college professors, career politicians, and other types who have never held real world jobs occupying the White House and Congress… And when I consider that half of this country is on some form of government dole, I know there is no political will to rein in spending and borrowing.
Crux: Yes… we all need insurance from that. Do you think at least large institutional investors, like mutual fund companies, understand gold?
Hunt: Absolutely not. They are just as ignorant about gold as the average Joe on the street. They might even be worse.
From the early 1980s to 2000, nobody worried about insurance. Stocks and the economy boomed for nearly 20 years. Gold languished for a long time.
Its importance as real money – as a crisis hedge – was forgotten by most people… even by the supposedly smart folks who run big investment funds.
They learned their trade during a period of rising stock prices and falling gold prices, so they think gold is something right-wing nuts stockpile alongside canned food in a bomb shelter. It’s amazing how a few decades of smooth sailing will make folks forget gold’s importance as insurance against disasters.
I’ve heard lots of supposedly smart institutional investors pooh-pooh gold because it didn’t perform well during the 1980s and 1990s. They’ll post charts showing how it lagged behind stocks and real estate.
It’s a silly comparison, because gold isn’t an investment like stocks and real estate can be. Gold is just gold. Like I said, you own it and hope to never have to use it. You don’t get it confused with a stock like Johnson & Johnson.
Crux: I think you’ve made your point. Any parting shots?
Hunt: Just one more. It involves another myth about gold… the belief that anyone knows where the heck it’s going over the coming years.
Every day, you hear some guru claiming gold is going to $2,000 or $4,000… or even $10,000. Those kinds of price projections are just hot air. Nobody – not Warren Buffett or Ben Bernanke or George Soros – knows how high gold will go in the coming years.
It’s tempting to make comparisons to other wild periods like the 1970s or the 1930s. But those historical comparisons aren’t worth anything. I’m going to catch hell for saying this, but they aren’t worth anything because this time is different.
I know “this time is different” is a dirty phrase in the investment business – but given the U.S. debt situation, our runaway entitlement spending, Europe’s massive debt problems, and the emergence of Asia as a wealthy gold accumulator – this is a different gold market than any we’ve ever seen. I don’t place any value on any past price action here… or any price projections… or any attempts to value it.
You can’t value gold like a stock… where you’d say, “I’ll pay 10 times earnings for gold.” You can’t value it like a rental property and say, “I’ll pay eight times annual rent for gold.”
The important thing for investors is to forget about the noise you hear on the Internet and television, and just steadily accumulate ounces of gold. Try to buy a little more each quarter or each year.
Don’t see it as an investment. See it as money… as real wealth you can hold in your hand. That’s how it’s been seen for thousands of years. It will eventually be re-discovered by the general public in the coming years.
Crux: Thanks for your time.
Hunt: My pleasure.