Short and Sweet Blog

John Schoen, a columnist for MSNBC’s personal finance site, writes about gold. gold bugs and gold values in an article titled “Gold Bugs Fly High As Values Soar.”  This article features prominent quotations from an “investment strategist” at Barclay’s Wealth, Michael Crook,  http://www.msnbc.msn.com/id/37490761/ns/business-personal_finance/.  Says Crook: 

As the market realizes that the events that it’s working though are not the end game, the selling from the ETFs creates source of downward momentum that we actually haven’t seen before,” . . . .  Investment demand has become a much a larger source of demand than it used to be. So the question is that a true shift in preference or it is it a bubble? We’re wagering it’s the latter.

As indicated by this quote, Crook and Schoen’s article generally take the view that the current run up in gold is just another bubble not unlike the bubble in the early 1980s when gold rose in price to over $800 per ounce.  If so, this bubble could mimic the tech stock bubble or the oil bubble or even the housing bubble which is still in the process of popping.

I wrote a response to Mr. Schoen.  I would like to share with you the gist of that response.

John:

Do you have any bullion gold yourself?  If not, I would be interested  in an article about why you’ve decided to avoid bullion.  Is it because you see that in the last century the fiat dollar has never collapsed therefore it is not possible that it will collapse?  Do you think it is impossible for the fiat dollar to become worthless or nearly so?  If not impossible, how ‘unlikely’ is it do you think?  If it is merely ‘unlikely’ and not impossible how do you quantify the likelihood of the occurrence of that unlikely eventuality?  Have you read or do you know of Nicholas Taleb’s book, “The Black Swan” which concerns the impact of the highly unlikely event or non-event? 

I consider it unlikely that gold will lose half of its dollar value over the next twelve months but it appears to me that the difference between you and me is that I don’t consider it impossible that this will happen or that it may double again.  If an event such as these were considered impossible by some, I would have to understand why they believed it was impossible before I would believe in its impossibility.  Crook simply opines that markets are discovering that this period is not the “end game.” 

The destruction of gold’s current valuation or the doubling of it is not impossible at the very least because Congress could conceivably pass a law deeming the value of gold at $600 per ounce or there could be rampant deflation when the Bush tax cuts expire in 2011 or the Fed could successfully reduce the size of the money supply when velocity returns to a more normal value and in any of these events and a million more I could think of, gold would lose much of its market value.  Likewise war and hyperinflation might push the value quickly higher. Virtually anything is possible, even the election of an honest government at some point in the future is possible, but that’s another subject. 

It seems to me, however, that holding some gold is a reasonable hedge against a Talebian Black Swan event, hyperinflation, loss of the dollar’s reserve currency status in favor of gold, or world war, whatever.  Not likely events, and events too terrible to contemplate to be sure, but not impossible ones either.  

I should also have included this but I didn’t think of it until later.

No more than 5% of net financial assets held in gold though, is that a good idea John?  For me and apparently for you, diversification is important.  For others, with the US government apparently ready to step in to take care of them in their dotage although they haven’t provided for it themselves, why not?  They could end up mega-rich.   If they win great, if not, it would sort of be like the Wall Streeters who were bailed out by the government too.   

You also cite Congressman Anthony Weiner and his public crusade against gold companies supporting conservative talk show hosts.  Weiner has criticized at least one prominent coin dealer for a “mark up” of either two or three times (208%) the melt value of some gold coins they offered for sale. Does Weiner understand the numismatic value of gold?   There are pennies and a few other coins which I have owned which are worth hundreds of times their base metal value?  Is Weiner simply saying that there are rare coin dealers who are sharks?  Duh!!  Who doesn’t know that?  However, are the people who are buying that type of gold betting on the Talebian Black Swan of government confiscation of non-numismatic gold?  Wouldn’t this action very likely send the price of the remaining gold, the numismatic gold, that much higher?  I just wonder?  Is the public as stupid as the intelligentsia think?  Do we all need to be protected from ourselves and from the evil,  racist Glenn Beck? 

 P.S.  Your point about exchange value is a good one John.  Perhaps some silver coins then as well? 

In the end, who knows what will happen.  The Boy Scout motto should ever be our watchword whether young or old, “Be Prepared.”

Congressman Weiner’s report on Goldline, the offending coin merchant, can be found at http://weiner.house.gov/Reports/GoldlineReport.pdf