All That Glitters

May 24th, 2014

Every investment decision has its pros and cons. And yet, one has to search far and wide in order to find an argument against a gold investment. Many pro-gold articles, such as found at Gold Eagle or 321gold, are written by those tied closely with the gold exchange, and have a very good reason for their bullish outlook. Other articles fall squarely into the “doom and gloom” camp, of which gold has long been the favorite. It seems that no one is motivated to take the other side.

It’s high time this was rectified. In an effort to present both sides of the coin (no pun intended), I have delved deep into the underbelly of the Internet to bring you a rational debate against gold. But first, a disclaimer. I am not personally anti-gold, nor am I recommending you avoid gold in your investment portfolio. There are in fact many good reasons to invest in gold. I am merely presenting some thoughts to consider when making an investment decision.

1. Gold makes a Lousy Investment
An investment, strictly put, is an exchange of existing value (typically cash) for something that you anticipate will result in an increase in value. Basically, you are hoping to make a profit: a nice solid return that you can brag about over the dinner table. Primarily, this profit is earned either by reoccurring payments (i.e. dividends), or appreciation – of which gold only has the later. Typically, appreciation is magnified through leveraging, the practice of which gold does not offer. However, this may be a good thing, as the value of gold has been headed down for the last 25 years:
As steady as the tortoise, gold has been sinking since 1980. Over the last three years the price has been picking up, but it is still well within the overall downward trend. “Don’t forget about the spike in 1980,” I hear the gold zealots saying. True, gold spiked almost 20 times in the course of just a few years. However, when compared to the big picture, it is comparatively small. For example:
When comparing the growth rate of gold to that of the Dow Jones, you can see the the spike in 1980 is overwhelmed by the growth of the stock market. Worse still, the risk you incur trying to “time the market” can be devastating. While a handful of investors where lucky enough to sell at the top of 1980, and make a fortune, this quick buy-and-sell strategy is not only terribly difficult to pull off, but also quite risky. For example, the very next year gold shed over 25% its value. Alex Wallenwein of Safe Haven summed it up well when he said “…as an ‘investment’, gold absolutely sucks.”

2. Gold is Not Inflation Proof
One of the biggest arguments for owning gold is its supposed ability to withstand inflation. As the general price of goods rises, so does the price of gold, or so the story goes. However, the numbers just don’t bare this out. Behold:
In the last 20 years, while overall inflation has nearly doubled the price of consumer goods, the price of gold has barely risen 10%. In fact, previous to the last three years, gold was cruising along at 20% less than it’s original value. To understand this, you must appreciate two things: 1) Gold is a very emotionally driven commodity, and as such, will rocket up during times of concern, but will equally crash during times of confidence. This is what causes the volatility in gold, not inflation. 2) Unlike other commodities, gold is controlled by a handful of world banks, who have an interest in keeping the price of gold steady. While gold does perform well during times of financial stress, typically its value does not grow fast enough to keep up with inflation.

3. Is Gold really all that Secure?
My favorite argument for owning gold is the professed safety it provides during calamity. “You can sleep easy, knowing that when the U.S. economy shoots straight down the toilet, your gold will provide you with all the bartering capability you need.” Hum.

One result of the Great Depression commonly left out of high school history books was the United States Government’s seizure of all privately held gold. On April 5th, 1933, in a desperate attempt to lessen the effects of bank runs, President Franklin Roosevelt commanded all citizens “return” their gold. The very wording implied that the government considered its self the original and rightful owner of all gold in the nation. While Roosevelt assured the country “the order is limited to the period of the emergency,” this order remained in force for over forty years.

It is not unforeseeable for the U.S. government, finding its self in another time of crisis, to again claim the nation’s gold. A plummeting U.S. dollar will eventually need to be backed by something, in order for foreign economies to feel it is worth more than the paper it is printed on.

Even more probable is the sale of huge amounts of gold by the central banks of the world. The vast majority of the world’s gold is controlled by a handful of large national banks. They periodically release some of this store to the world, in order to keep gold prices at bay. However, these banks have made it clear on several occasions that should we find ourselves in economic turmoil, they would sell off large portions of their reserve, driving the price of gold down.

In conclusion, gold may not be the safe harbor it is touted as. When it comes to “economic disaster securities”, one must consider the political aspects of a world in crisis, not just the economic. Right or wrong, gold is a controlled substance, with a turbulent history. And more important still, should we find ourselves in such a disaster, gold may glitter, but it can be pretty hard to eat.

Cutting the Safety Net

May 24th, 2014

Fresh off his winning high from November’s elections, President George W. Bush is ready to get back to work, the political capital he apparently earned already burning a hole in his pocket. With war still raging in Iraq, the U.S. dollar plummeting to record lows, and a prison scandal starting to really heat things up in Washington, what is on top of the President’s agenda? Why, the privatization of Social Security, of course.

Social Security reform is a favorite amongst politicians. It seems like every four years or so, the boys on the hill are off “saving” it once again. But why is a 70 year old program in such constant need of salvation? Surely one of these crusades would have solved the problem once and for all.

When discussing the Social Security program, one needs to keep in mind that it is completely different from other retirement plans. Pension plans, for example, are retirement savings accounts, backed by the companies that run them. It would be illegal for a company to raid this account, even in order to pay current retirees.
This “pay-as-you-go” structure is at the heart of all the problems Social Security has, and is now having. As an ever increasing number of Americans reach retirement age, and then go on to live increasingly longer lives, the financial commitment Capital Hill has to our seniors keeps getting larger and larger. The big dilemma here is that the amount of money siphoned from our paychecks is not keeping up. Each time the Social Security program is “saved”, the politicians responsible have done nothing more than shuffle a few numbers around in order to ensure existing retirees continue to receive a check in the mail. And yet, each time this is done, future generations are robbed. Thus far, nothing has been done to ensure Social Security’s long term solvency.

What’s a nation to do? There are only three possible solutions to the current Social Security mess: raise taxes, cut benefits, or earn a higher return on collected taxes. It’s no secret that Bush really hates taxes, and cutting benefits would be political suicide. While the President no longer needs to worry about reelection, no Congressman with a pulse would vote for a benefit cut. As such, it should come as no surprise that Bush’s plan revolves entirely on the third option: trying to squeeze more return out of the money already being taxed.

The current Social Security program is structured so that money is shuffled through U.S. Treasury bills. Much like your bank’s savings account, while being very secure, t-bills don’t make much of a return: currently 3.5% for a 5 year note – barely higher than current inflation rates. By comparison, the Bush administration is telling us we can expect a solid 6.5% annual return though his Social Security reform: investment through “privatization”.

There is already a lot of controversy building up around the President’s plan: where we will get the estimated $2 trillion needed for the transition (cough borrow cough), is Bush creating a cash-cow for Wall Street, and even whether or not investing in the stock market would result in higher returns. But the biggest issue is summed up near the end of Lakely’s description: safe stock-market funds. Apparently Mr. Lakely hasn’t invested much money over the last several years.

The U.S. Social Security Administration knows that Social Security was never designed to be your entire retirement plan. There are proper vehicles, even government structured vehicles, for individuals to have control over their retirement savings: 401ks, IRAs, etc. If you want to pour your personal nest-egg into the latest bio-tech stock, go right ahead. But giving Americans the ability to destroy their backup plan is not only foolish, it is disastrous.

The folks over at JustOneMinute make an interesting comparison between home ownership and Social Security ownership. “Can people handle it (Social Security ownership)? I have rented homes, and owned them, and I promise you – owning a home involves more responsibility and greater financial risk. However, it is part of the American dream; owning one’s nest egg ought to be part of the dream too.” While this is a nice thought, the comparison has very little merit. As mentioned above, every American has the option of “owning one’s nest egg” already. Privatization of Social Security is more comparable to allowing citizens to buy and sell government housing.

But there’s no need to worry- President Bush won’t let us gamble our retirement away. However, tracking the DOW Jones Industrial Average from 1920 until the present shows that the market was up less than 60% of the time during any given month. I can name a few horses who have better odds than that.

Social Security should be just what is says: a security blanket for our social welfare. It is there, like a safety net, to catch us when all other retirement programs fail. Allowing American’s to invest this account into a risky environment, like the Stock Market, is tantamount to handing us a pair of scissors. After all, if Americans were already accomplished investors, there would be no need for Social Security.