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Al Jacobs invites you to take a look at his most recent book, Roadway to Prosperity, which embodies the heart of his nearly half-century in the investment business.  You'll find a wealth of information there.

 

ROADWAY TO PROSPERITY

PEDDLING GOLD: FLIMFLAM AT ITS FINEST

The precious metals market, particularly gold and silver, is nothing less than dynamic.  Whether it’s suitable for profitable investment is another matter.  The hour-long radio infomercial I recently tuned to proved too persuasive to ignore.  I couldn’t resist placing a telephone call to request a brochure guaranteed to provide “invaluable information available nowhere else.”

Requesting the brochure took a bit of doing.  Getting an assurance it would be sent required I first fend off three different “specialists,” each encouraging “my immediate participation” by placing an order for gold or silver with their firm.  Luckily I displayed as much perseverance as they; the last of them finally gave up and agreed to ship it off in the mail.

The brochure arrived a few days later.  From it I gleaned not a word of objective information, but I most certainly viewed a work of art.  The impressive cover is adorned with an enticing assortment of golden ingots.   The presentation includes an informative 2,500-year history of gold, several graphs depicting the rise in the metal’s value over the past dozen years, and comparisons between gold and alternative investments, particularly corporate securities and currency.  Its implementation as a hedge against inflation is stressed repeatedly.

The brochure does not contain a hint ownership of gold can be anything but advantageous.  Statements declaring gold “. . . means safety in any language,” as well as “. . . provides protection against currency devaluations and continued market instability stemming from the global financial crisis,” are dominant themes.  If a single quotation must be chosen to summarize the impressively packaged12-page offering, it is: “Gold is an internationally recognized asset with strong intrinsic value that stably increases in spite of fluctuating stock markets and temperamental economic environments.”

So much for this particular purveyor and the impressions promoted.  There are many other precious metals dealers advertising regularly in the media, and I suspect each delivers a similar pitch: Buy gold now!  It can only go up – up – and up!  And why shouldn’t this be the message?  It’s unreasonable to expect a rational analysis of gold as an investment from a firm which makes its profit marketing the metal.  Perhaps this may seem cynical, but it’s claimed, and rightly so, by necessity all marketing schemes must be cynically devised.  Now let me provide my view of gold as an investment.  Regardless of whether I’ve accurately analyzed the variables, at least you may be sure, with no conflicting interests at stake, I’ll exhibit no bias.  But first, let’s flash back in time to get an historical perspective of the metal’s performance.

An appropriate date to start our viewing is 1833 – exactly one century before the world found itself in the depths of perhaps the severest and most prolonged depression in mankind’s recent history.  And during that one-hundred-year-period the world price of gold remained nearly unchanged at between $19 and $25 per ounce.  Not until the early 1930’s, when the price of the metal became regulated by government fiat, did its value began to fluctuate.   By 1934 the value of gold settled in at $35 per ounce, largely the result of the U. S. government, under newly-elected President Franklin D. Roosevelt, setting that as an established price together with a prohibition of gold ownership by its citizens.  And there, at $35 per ounce, the price remained until 1970 when President Richard Nixon rescinded the policy, deregulating the metal, and once again permitted ownership by U. S. citizens.  During the roughly four decades since its deregulation, the price of gold reacted to various market forces, often unpredictable.  By 1980 its price exceeded $600 per ounce; by 1990 it could be purchased for $375; ten years later, in 2000, it dropped to $275; by 2005 it recovered to $450 and on August 22, 2011, a scant six years later, reached a record high of $1,908.  At this writing, in early November 2017, its value is $1,270.  For whatever reason, gold has languished somewhat these past six years.

Enough of history – on to the future!  What are the near-term predictions for the price of gold?  According to GoldStockBull Investment Strategies, a marketer of the metal, a strong advance in gold prices is forecast, with a per ounce value of $2,200 in 2018, $3,000 in 2019, $4,200 in 2020 and $5,000+ by 2022.  A current forecast by Technical Analyst Christopher Lewis of FX Empire anticipates a near-term rise to the $1,300 level, but uncertainty as to whether buyers will support a higher value.  However, Daniela Combone, best selling author of Currency Wars, envisions a return to the near parabolic rise in the metal with a value of $10,000 per ounce a distinct possibility. If nothing else, this merely reflects a combination of vested interests and hazy vagaries of an uncertain market.  Simply stated, no one really has any idea what its value will be at any future date.

Having declared it’s anyone’s guess where gold is headed, I’m now prepared to offer my opinion on exactly this.  Let me preface my prediction by saying I believe three principal factors determine gold prices over the foreseeable future, and for our purposes I consider foreseeable as extending only through this decade.  What may happen in the years beyond 2020 becomes increasingly less related to anything we can anticipate or control.  These three factors are (1) inflation in the economy,  (2) governmental intervention, and  (3) intrinsic use of gold.  Let’s look at each of these.

(1) Inflation in the Economy.  A conventional belief exists, perhaps accurately, that rapid inflation in an economy will cause gold prices to rise.  In characterizing inflation, we’ll accept the definition of The American Heritage Dictionary of the English Language, Fourth Edition, 2000, which states:

A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

If we look no further than the uncontrolled spending and increasing national debt our nation’s leaders promote, we cannot help but conclude an appreciable rate of inflation is in our future.  If this presumption is correct, this will spur a rise in gold prices.  Chalk up one vote for an increase.

(2) Governmental Intervention.  Whether or not uncontrolled inflation will result from our nation’s spending policies, there can be no doubt our economy is not truly recovered from the miseries of the Great Recession.  My belief is we experienced a depression, not a recession, with high unemployment continuing as a major drag on the economy as our citizens’ suffering persists.  Regardless of your political experience or economic expertise, there’s really no way you can predict what action a government will take if our economy once again unravels.  As an example, look at how the tiny island nation of Cyprus once attempted to bail itself out of financial problems by stealing its citizens’ bank deposits.  Regardless of the country, elected officials generally specialize in getting elected to public office, rather than in effectively resolving problems after being elected.  We may only guess as to what precious metals regulations our government may enact.  I’m afraid this second factor cannot guide us in predicting the direction gold prices will take.

(3) Intrinsic Use of Gold.  We are now at what I believe to be the crux in determining future gold prices.  Central to my reasoning is a fundamental reality: Except for its use in ornamentation, the metal possesses no commercially viable application.  It can be admiringly gazed at, sensually fondled, and tastelessly drooled upon, but that’s where its use ends.  Simply stated, the value of gold is what a buyer can be induced to pay for it.  I contend the fundamental value of any investment relates to the income flow it produces.  And an investor in gold who sees its value plummet can resort to no money-generating application while waiting to see if the market corrects itself.  This lack of income generation does not portend well for gold.  Cast one ballot in the downward direction.

I’ll now summarize my expectations as to where I see gold heading over the next eight to ten years.  Fundamental to my prognosis is the recognition any rapid escalation in price per ounce is contrary to its historical trend.  I acknowledge, of course, vast fortunes may be made through involvement in precious metals, and at times it can seem almost magical.  However, when it comes to our personal investment program, we must put fantasy aside.  The gold frenzy is quite recent; it’s my experience what rises rapidly normally declines the same way.

I’ll now insert another factor into the mix.  I’m convinced the escalation in gold prices in recent years is attributable to a combination of two realities: First, that most investors have been deprived of any viable investments.  Money market funds and CDs pay next to nothing; bonds appear hazardous if interest rates rise as many predict; and dividend yields remain at an historic low.  Real estate shows promise, though sophisticated real estate investment is unavailable for most persons.  So, with no truly enticing investments to attract the public, gold is offered as an acceptable alternative.

The second half of the reality is evident to anyone paying attention.  For the past few years precious metals, and particularly gold, continues to be touted from every conceivable forum.  Talk show hosts pitch it; television ads praise it; financial advisors of every stripe are hired to recommend it; full-hour infomercials extol it.  You cannot spend fifteen minutes in any media environment without being told gold is the investment of the century and its value will rise forever.  As expected, there are legions of poor innocents who, burned by securities or real estate, are eager to travel the one sure road to everlasting wealth.  Thus gold is effectively peddled, and so long as brisk sales continue, its price will resist a warranted collapse.  It’s my belief, however, at some point this market will return to earth. 

I’ll conclude with a final thought.  Whether or not gold ascends into the stratosphere is not nearly as meaningful as the question: Is gold a wise investment?  My response must be negative.  Despite recommendations to the contrary, there is no sound justification for investment in precious metals, whether as the base metal, the specie, or stock in related companies.  The markets for gold, silver, and the like long ago entered the pseudo-religious realm, with adherents extolling their virtues, much as with Scientology or transcendental meditation.  These markets are, by their nature, subject to manipulation, so performance cannot rationally be predicted.  In short, I see investment in gold to be nothing but an exercise in pure chance.

 

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