A Tale Of Two Bankers

One of the great things about living in a democracy is that citizens have the freedom of speech. It is a freedom that is exercised without the fear of bodily harm, but always with the possibility of disagreement, correction and sometimes a little ridicule. Future events of course are the final arbiter subject to changing circumstances as what may be a good decision one day may be a total disaster the next.

The purpose of this short essay is to take issue with a recent article written by the business columnist David Olive for the star.com and which was reproduced by two other mainstream gold commentary web sites. The article was titled "Olive: Don't believe hype over gold" and can be found at:

(www.thestar.com/business/article/742619--olive-don-t-believe-hype-over-gold)

Whilst any site retains the right to publish anything it deems fit, I am saddened that these sites (Kitco and 321gold) allowed their Christmas cheer to get the better of them and publish something that cannot be described as informed comment.

The depth of the analysis provided by Mr Olive is not only shallow but also lacking a satisfactory level of intellectual integrity. But let us briefly look at the basis for my opinion.

1. His makes the statement that "for the second time in 30 years, we're in the midst of a classic gold bubble." Further on however he proclaims that "gold should be trading at $2163 to match its previous high." So which one of the two is gold Mr Olive, a bubble or a flop? You can't have it both ways.
2. Much is made of the fact that gold achieved $850 on one particular day in 1980 and since then, commentators on both sides of the fence have clung to that price as if it was a foundation rather than a signpost. If we were however to take the average price of gold for 1980 of $612 then the price today would be around $1,557 adjusted for inflation. If we took the average for the three years 1979-1981 then the price today would have been $1,167. If we took only 1979 and 1981 the inflation adjusted price would be $973. This is a fairer approach to analysis rather than picking on a single day or single method to make a point. Why else would analysts constantly refer to the 50 dma and 200 dma?
3. Mr Olive then trots out the usual big names such as Messrs Nadler, Roubini and Hu Xiaolin who have all apparently identified a gold bubble. Bubble or not the Chinese are still buying for the simple reason that the US dollar is in trouble. Add to that the Indians and the Russians. In any case, I'd rather be in a gold bubble rather than in dollar trouble.
4. Mr Olive quotes Professor Roubini saying that "gold has no intrinsic value." Really now. I suppose he will tell us that a printed bank note DOES have intrinsic value. Give me a break! Are you going to trust a banker that has gold in his vault or the one that has a photocopy machine out the back?
5. What follows is the ridiculous statement of, "try paying for groceries with a gold bar." Well, once upon a time they did (in gold coins). Come on Mr Olive, the reasoning does not befit a paid columnist. Should I retort with, "try paying for a gold bar with groceries?"
6. It gets better though with his statement that gold "is in almost infinite supply." The only thing that is infinite in supply is paper money and in the words of Einstein "man's stupidity." Does anyone still think gold is almost infinite in supply? Mr Olive's reasoning beggars belief. With only around 160,000 tonnes of known gold in the world, this equates to less than 1oz per human being world-wide.
7. Mr Olive continues to outdo himself when he states, "gold, unlike oil, does not change its chemical composition, and turn into something else..... when used....it is a notoriously soft metal." Mr Olive you are right and thank God for that. Space travel would not have been possible without gold as a shield on the space rockets. Paper notes though do change chemical composition and return to their intrinsic value of zero as Voltaire said. In fact, I believe it was Voltaire who also said that money backed by confidence alone is not true assets. The beauty of gold is that you can beat it into any shape you like but you cannot beat it to death. It will always be constant in its properties, its lustre and its indestructibility under natural circumstances.
8. But wait, Mr Olive reprimands us for not investing in Potash Corp (up 771 %) and Walmart stock (up 68,109%). It's so convenient of him to forget those who invested in Lehman Brothers, GM, Fannie and Grannie and hundreds of other victims of the current downturn. Out of hundreds of stocks that have bitten the dust or sniffed it, Mr Olive picks on two exceptions. Hey, why not use the example of some long shot horse race?
9. Finally, Mr Olive, I will not bother with your statement that gold pays no dividends other than to direct you to an earlier article of mine titled. "TOILET PAPER PRODUCTION DEFIES MANUFACTURING SLUMP." Read it and weep. In a nutshell though, the two main points:

"Even if the $1,000,000 in currency (in 1929) was invested at a tax free compound rate of 4% per annum in a savings account it would still only be worth just over $23 million in 2009."

Whereas:

$1,000,000 in gold at a price of $20.67 in 1929 would now be worth $53,217,223 or $31,428,571 if bought at $35.

Before I part dear readers, I would like to draw your attention to another of Mr Olive's articles that was printed the next day (12/28/2009) titled, "It was a decade of volatility for investors." Guess what? Gold was ranked 4th, with an increase of 285% for the decade. Once again, the first three places went to a specific painting, a specific wine and one particular stock. Now there's investment analysis if I ever saw it. You just have to figure out in advance which painting, which bottle of wine and which stock to invest in.

Mr Olive also complains about high storage costs for gold. I suppose an expensive painting does not require a vault, an alarm system or insurance costs either. In case you were not aware you can buy gold through the Perth Mint in the form of a certificate with the Mint storing your gold.

It is true that if an apocalyptic scenario unfolds, guns and food may be more effective for survival than gold in the short run. The funny thing though is that history tells us that people fleeing persecution, war and other calamities relied on gold even for events that took place in the 20th century.

As I said earlier Mr Olive, trust in the banker with the gold and not the one with the photocopy machine. If you are in any doubt, I suggest you bury $1,100 in notes and next to it a gold coin. In ten years time we can talk about it again. Let's see then which one has the better intrinsic value.

Gold is gold Mr Olive and I can only quote the words of Marc Faber who said:

"I would buy every three months some gold and not worry so much about the price because the weight stays the same."

None of us is all-knowing in our analysis of events and facts, or all-seeing about what lies ahead. It is incumbent upon us however to be honest and professional in our approach when what we write potentially reaches many people trying to make an honest assessment of what to do with their lives and savings.

In my opinion gold may or may not have kept its date with inflation depending on how you want to make the calculation. It definitely is waiting though for its date with history and this will unfold as the so-called jobless recovery together with 37 million people on food stamps and crumbling household, state, municipal and federal finances and house prices continue to demoralize the people and the economy.

Mr. Olive please stay in touch. One of us is wrong, wrong, wrong and I don't think it's going to be me.