Yesterday morning, I mentioned the extent of cognitive dissonance surrounding the Gold was surprising (What Are Gold’s Fundamentals?).

The reaction to Gold’s crash has produced some astonishing rationalizations. The refusal to acknowledge basic trading facts leads us to recognize that Gold bugs and traders have very specific rules that they MUST follow. These social conventions look less like a debate about asset classes and more like a religious cult.

The advocates for any sort of investing thesis have their rules, metrics, heuristics and biases. Here are the rules we teased out for the Gold Trade:

 

The Rules of Goldbuggery

1. Gold is a Currency: This is rule number 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.

2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.

3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior Rule of Gold manipulation. Gold runs up despite the overwhelming opposition to it.

4. The world MUST return to the Gold Standard one day:  It is inevitable that we will return to a Gold Standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a Gold Standard, we can derive prices of Gold in the $7,000, $10,000 even $15,000. Hence, we know its cheap even at $2,000.

5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher: NOTE: You must ignore, for the moment, that Gold has not gone higher for the past 2 years as Central Banks around the world have ramped up QE. This only means that ultimately, Gold will go much much higher.

6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!

7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles around you. Get yourself some gold coins and a Glock and you will be just fine when the whole world goes to shit. We welcome the era envisioned in the movie Mad Max.

8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.

9. Gold is a rejection of government, and their control of fiat money and finance: There are no printing presses that produce gold, it is finite, natural and God created. How much we scrape out of the ground each year is limited, and the only variable to the old equation. (Just ignore Man’s natural tendency to organize into to City-States over the past 12,000 years).

10. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future. Avoid empirical data at all costs.

11. Gold is always rallying in one currency or another: Sure, it may be down 30% in Dollars, the reserve currency it is priced in, but you can always find a currency falling faster than it does and claim you own it in that denomination. Last week, it was up in Japanese Yen. This week, it is up in Zimbabwe dollars.

12. China & India know the value of Gold; the Western world does not: The massive buying of gold by consumers in Chindia reflects the culture, intelligence and investing savvy of the people in these countries. The West doesn’t get it, and it is their loss.

Bonus rule: Never admit Gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever.

 

The enormous amounts of dollars involved in the Gold trade has attracted all manner of charlatans and frauds to the Gold trade. Although this list can help you separate the true believers from the criminals, time has proven them to be both are enormous money losers.

Ignore the risks of being a gold bug at great peril to your portfolio . . .

 

Category: Gold & Precious Metals, Humor, Psychology, Rules, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

106 Responses to “12 Rules of Goldbuggery”

  1. Moss says:

    What about the Peak Oil Buggery.

    • carchamp1 says:

      Yep. The gold mania is pretty harmless to most of the population and pretty amusing. High oil prices have a way of crushing the global economy.

      Peak oil was a big thing when I was a teenager in the late 70s and early 80s. President Carter put solar panels on top of the White House. From 1980 to the late 90s oil proceeded to drop from $40 to $10 per barrel. It turns out ridiculously high oil prices promote less oil demand and more oil production. This is already in the process of happening now.

      • Saxifraga says:

        The problem is: The accessible max is consumed in 20..50 years. Every time now the economies start to grow again they will be out of fuel or at price levels of around 150,-$ or more. Of course there is no other energy source with that high energy density available to us. So we will have to adopt by giving up growth. Liquid fuels from gas, coal and corn will be very inefficient compared to drilling an oil well.

        Also atomic energy and gas are no way out, because we would have to replace our existing infrastructure that´s made for fossil fuel in 20 years. That´s not possible and would itself consume most of the energy we want to replace.

        We can go for solar and wind but that we would have to start now with massive investments and we would have to downsize our scrupulous squandering of energy resources. No more useless flights to Asia for a spending spree and holidays. No more new cars every year or two. No more housing bubbles. No more cheap tourism to generate income in areas without other enterprises.

        So the quintessence is: Gold is more or less useless, carbon fuels are what our world depends on and cannot replenish when it´s gone. That´s why goldbugs are wrong and the Club of Rome is and was right. Additionally climate change will hit us exactly the moment our fuel resources are dwindling. And there is an obvious causality to that.

        We have already killed our grand grand children. No amount of gold and weapons or wishful thinking will change that.

      • carchamp1 says:

        Note that the boom in oil prices has coincided with the boom in gold, silver, copper, iron ore, lead, cement, etc. It is hard to fathom that these aren’t all connected, just as they were in the 70s and 80s. Is it possible we truly have a peak oil problem, but the run-up in gold, for example, is purely speculative? Just the other day I heard the phrase “peak copper”. So, that’s another possibility – we just so happen to be running out of these commodities at the same time. Unlikely. What I’m saying is that this entire commodity run-up, including the one for oil, is the result of speculation, stockpiling, and hoarding. Although the players were different 30+ years ago, the frenzy is the same.

        We’ve had two important factors in the last decade, or so, that generated the commodity boom, the deregulation of our commodity markets and an aggressive expansion of China’s command economy. It is these two factors, not peak anything, that drove prices higher and is in very large part responsible for the Great Recession.

        As for our so-called commodity “investors” (we used to call it hoarding), they are fickle. Over time, commodities will underperform bonds and stocks. As much as I’d like to see regulators push these guys out of their trades by force, I’m 100% positive they will remove themselves.

        The rebalancing has already started in China. Useless investments in cities that no one lives in has costs. The China “miracle” is a fraud.

        The end result of this will be less demand for both the physical and synthetic, plus higher useable reserves, which will equal lower commodity prices … and an economic boom.

      • zman1527 says:

        Sorry, but the earth IS finite. The easy to find, rich deposits of metals have almost all been found and most have been mined. Most gold miners will make no profit at $1350 and the same is probably true for copper at $3.20. So, now that it has become harder and more expensive to find new resources, the prices are falling along with profits. That is hardly sustainable.

      • carchamp1 says:

        zman,

        I don’t see a Reply button under your post, so responding to my own post will have to do.

        Yes, the earth is finite. What is not, however, is human ingenuity. Efficiency, recycling, and resourcefulness will continue to stretch our natural resources. This has always been true and will continue to be so.

        The break-even prices for gold and copper (etc.) mining will fall somewhat because of falling energy prices in the coming years. However, profits will decline and the least efficient producers will go bust. There will be pain.

  2. Chief Tomahawk says:

    Au’s run from the $250s to $1,800 or so was quite a move. Yes its melted since and lately turned into a cascade lower, but with all the flaws of man running wild in the current world of Tier 3 assets, having some Au in the portfolio allows me to sleep at night.

  3. BenE says:

    Gold is old people’s bitcoin or as Buffet said:

    “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”

    • ottnott says:

      bitcoin demonstrated the glory of a pure currency, what gold cold be if it were freed from the vile manipulations of central bankers.

    • zn8ke says:

      exactly. it’s completely useless. a minute part is used in the industry. it cannot be eaten. it never decays. if we would to stop digging holes in Africa, the gold we have now would last forever! when we on top of that don’t have any inflaycion it’s rather ridiculous to think that gold would rise and rise. BTW, the top we had in 1980 still hasn’t been caught if you adjust for inflaycion :)

    • Saxifraga says:

      He is exactly right. But riding the wave of insanity I made 100.000 out of 70.000 in 4 years. ;)
      Not bad in a depression.

    • gloeschi says:

      “Little pieces of paper with a one-eyed pyramid and reference to a deity which no one has ever seen are exchanged for houses, cars etc. You cannot eat that paper. It has no utility. Anyone watching from Venus would be scratching their head”

      • Paper money is backed a) a collective belief system — so is gold — but the fiat currency also is backed by the ability to tax and have a standing army

        THATS the difference between paper money & Gold

      • carchamp1 says:

        Barry,

        Consider that, despite conventional wisdom, fiat currency, or paper money, is backed by far more than general collective belief. When you think about how a fractional reserve system works, a currency is backed by productive enterprise and work. In a fractional reserve system, money is, yes, created “out of thin air”, but it is loaned out with some confidence that it will be paid back.

        Now, as we saw with the housing bubble, capital is sometimes employed very poorly. When that happens we ultimately get a contraction, sometimes a very powerful one. This is inherent in fractional reserve systems. That is, it is supposed to happen. It is part of the plan.

        While I think the idea of having a few bankers at the Federal Reserve pull the switches on monetary policy should be looked at (could this be done in a market-based approach?), I tend to think the fractional reserve system is pure genius. Probably never heard that before.

      • ElSid says:

        Great utility. You get the pleasure of being taxed to erect a standing army to defend the value of the currency.

        Maybe, just maybe, that’s why people are getting sick of it.

      • hidflect says:

        The only way you can express the value of your gold is by turning it back into those annoying little pieces of paper. Unless you want to buy a packet of chewing gum with a 100 ounce ingot…

  4. MayorQuimby says:

    Hall of Fame post! Fantastic Barry.

  5. Thalamus says:

    Those who cannot learn from history are doomed to repeat it. Money issuance can’t exceed productive capacity without devaluing a currency. There is no apparent devaluing of the currencies (since Gold is declining) hence QE by all the central banks must not be from desperation! They would never suppress paper currencies’ primary competitor to make it appear this way? Why are all the central banks buying gold? You have to look beyond one step ahead.

    • Acharn says:

      All the central banks are buying gold? What on earth for? They don’t need it and they don’t use it, except to decorate their executive bathrooms. And if they’re buying, why is the price still falling? They buy bonds and the price goes up. They buy mortgage backed derivatives, the price goes up. If it’s true they’re buying gold, it seems like the price should go up, or at least stop falling.

  6. Mike in Nola says:

    V.G.

  7. blackvegetable says:

    Consider the post-apocalypse masterpiece A Boy and His Dog…….The two highest forms of currency are

    Canned Goods

    and

    Vag……..uh….NOT gold….

    • The Window Washer says:

      OH please! You Canned Goods fan boys are a joke.
      Hot sauce has a higher value per mass and weight.
      Hot sauce is easier to transport doesn’t go bad after you open it.
      Hot sauce is easier to measure in a low tech environment.
      ec tera ec tera ec tera

      I’ll back you on the second tier though.

  8. NMR says:

    Hey BR what’s happened to that lengthy but entertaining piece of goldbug windbaggery at which I was poking gentle fun? It was a perfect example of the goldbug delusion.

    • I pulled it until I could respond — should be ready later today.

      My inclination when someone blatantly lies like he did is to toast the post and ban them, but I assume this wanker is buried in his trade and so I am trying to show at least some empathy.

  9. mad97123 says:

    To your “all manner of charlatans and frauds” point we see:

    Goldman Stands By Gold-Rally Forecast Even as Price Drops
    http://www.bloomberg.com/news/2012-05-10/goldman-stands-by-gold-rally-forecast-even-as-price-drops.html

    Bill Gross
    http://www.businessinsider.com/bill-gross-i-would-buy-gold-here-2013-4

    Jim Grant
    http://www.businessinsider.com/how-high-can-gold-go-there-is-no-telling-james-grant-tells-cnbc-2012-9

    Dave Rosenberg
    http://blogs.marketwatch.com/thetell/2013/03/05/that-dow-record-is-nice-but-3000-gold-is-nicer-rosenberg/

    The list of charlatans and frauds could go in an on, the point being its hard for Mom & Pop to tell these guys are charlatans and frauds when you and other influential people link to them as smart people who may actually know something.

  10. dino says:

    To number 8, I would only add that the ominous macro forecast should be bolstered by statements like “analyst so-and-so predicted the last 3 recessions, so s/he’ll be right about this one too.” This would typically be followed by retaining a reputation firm to scrub all evidence of their timely warnings from the internet.

  11. gman says:

    I’m popping popcorn now..

  12. mad97123 says:

    Is the AMPEX ad at the top of your page to re-balance your portfolio with Gold and Silver you doing your part to further the fraud? Anything for some ad revenue I guess. I clicked it for you.

    http://www.apmex.com/IRABenefits/Default.aspx?utm_source=X+1&utm_medium=display&utm_content=728×90&utm_campaign=728x90_balanceIRA_wc.swf&dclid=6016172-3376914-5948745-80562164-256798834-53164033

    • There is an algorithm that looks at the page content — when I trash JPM, we seem to get Chase mortgage ads; when we discuss gold, we get Ampex ads.

      • b_thunder says:

        I bought a couple of gold coins from Ampex yesterday. In my goldbuggish opinion (IMGO) gold’s low enough to buy now and sell higher later, and in the meantime use it as conversation props.
        The ads do work, at least on occasion.

      • JayBondman says:

        That begs the question: should we be long Google?

  13. James Kostohryz says:

    Barry:

    Here are a few more rules to add to your list.

    1. When gold it is falling, it is only paper gold that is being sold. Physical gold is in hot demand. The demand for physical gold is so high that you literally cannot find it anywhere.

    2. When gold is rising it is because of legitimate demand for physical gold. Paper gold in the form of ETFs, futures trading, the like have nothing to do with it.

    3. When gold falls, it is the fault of HFT. When gold rises HFT has nothing to do with it.

    4. Gold = freedom, justice and the American way.

  14. ottnott says:

    Hey, Barry. No hat tip for your #2 and #3?

    I’m pathetically desperate for my 15 seconds of small-but-well-regarded-corner-of-the-internet fame.

  15. JayBondman says:

    The intrinsic value of gold is not financial, but material: it does not tarnish.

      • Braden says:

        Copper tarnishes. The roof of the Hotel Vancouver (home of the Agora Financial Show) is made of copper. It’s green because it’s oxidized over time. Gold is also better conductor than copper, more mailable, etc. It does everything copper does, but better. It’s just too scarce and expensive to be used in any kind of quantity (ie: electrical grids, piping, etc.)

      • offsideundo says:

        Unoxidized copper is more conductive (electrically and thermally) than gold. Electrical contacts are gold-plated for corrosion resistance.

      • Braden says:

        It occurs to me that I may have missed the point of your question.
        Yes, copper’s value is also material. The difference being that Cu is consumed mostly for industrial purposes, whereas Gold is consumed as a currency, an inflation hedge (rightly or wrongly), and for other general investment purposes.

    • KGaetano says:

      Gold oxidizes very little if at all. Ditto for platinum. Silver is in the same range. They are all beautiful. Beauty has some value at all times and places. A transitory, unstable value, but value nonetheless. Perhaps that’s why gold and silver have so often been used as currency, and have value seemingly greater than their utility.

      Copper is beautiful, but it oxidizes. Lead doesn’t oxidize, but only has beauty only to maniacs who insist that it can’t be replaced for shotgun ammo and fishing weights.

      It it’s accepted that gold and silver’s value is some sort of combination of durability, utility, and beauty, and that this makes them likely candidates as emergency currency, or currency in the event of social collapse–their investment utility is as a hedge against hyperinflation, or currency collapse/repudiation.

  16. Seems to me that the goldbuggery is a sign of a huge unmet need, demand for financial security in a world that cannot supply it.

    Here’s a possible contrary indicator: Our local Costco has been stocking and selling Very Large Safes. First time that I have seen that in the 12 years that I’ve been shopping there. Once a trend goes full retail, it’s close to peaking, right? Or could it be that gold, after decades in the wilderness followed by a strong runup by insiders, is only now going mainstream, and Costco just wants to be the latest retailer to make hay off an imminent gold rush?

    Perhaps it would help reduce the goldbuggery, if we had more market transparency and enforcement of things like insider trading rules, sequestration of investor accounts, rigorous financial accounting (Madoff, FASB157)?

    Since stock investors have been robbed blind twice in the last 12 years, a large fraction of 2006 homeowners were effectively bankrupted by 2009, the federal government’s been on a sustained trajectory towards bankruptcy for the past decade, and anyone with a bank account or a bond portfolio knows they’re being robbed by rates below inflation right now, maybe you have to give folks a bit of slack about wanting to have their own banks and some financial security at home?

    • DeDude says:

      What makes gold “financial security”?

      • Braden says:

        Mostly fear. It’s a natural, non-fiat currency.
        As Mr. Ritholtz has pointed out so well, that doesn’t make it a good or bad trade at any time.

      • The investors here have been saying it is useful for diversifying risk in a portfolio. A lot of the “diversified portfolio” allocations (modern portfolio theory) were empirically disproven in 2008, when nearly everything sold off except cash, but gold and government bonds held up much better than any of the normal “diversifying” equity & bond sectors. This is empirical, it’s not religion. Given the rising sovereign debt burdens of the past 5 years, one might wonder whether gold would do better in the next credit crisis (sovereign debt crisis?) than government bonds.

        Alhambra (never met ‘em, don’t normally read ‘em) have a very interesting article up (link below) suggesting that gold is potentially also a form of “financial security” for BANKS, since it can be loaned (in any currency!?) and thus provides a form of collateral for emergency cash-raising. I don’t know about their implicit suggestion that the bear raid on gold was driven by a bank desperate to raise cash, though. But I wonder if gold as a banker’s collateral of last resort might not be especially useful in situations where central-bank channels might not exist or not be usable…

        http://www.alhambrapartners.com/2013/04/15/we-have-seen-gold-prices-act-like-this-before/

        The goldbugs will refer to things like how it’s referred to as money in the Constitution, how it holds value during times of inflation, how it avoids counterparty risks, and how it’s harder to tax (or confiscate?) personal property than digitally recorded assets. That’s mostly irrelevant, just like “Dow 36,000″ is irrelevant and “house prices never fall” is irrelevant…

  17. [...] news is focused on the price of gold, so Barry Ritholz at The Big Picture has detailed the 12 Rules of Goldbuggery. Here’s a few: 1. Gold is a Currency: This is rule number 1. It is not a decorative or [...]

  18. Pantmaker says:

    I have no position in gold but had I it would have been jettisoned by now. Let’s not be so quick to judge these goldbuggers here. A trade is a trade. I see hoards of equity bugs with a similarly ridiculous list of equitybuggery. I stand on my prediction that all asset classes will join hands and jump from the cliff together. Buy low sell high. Everyone and everything is clearly high.

  19. Frwip says:

    Gold as an investment is a lagged measure of fear, as a possession, a pure matter of taste (which explains the initial price rise in the early naughties with Asia getting richer and buying gold for jewelry).

    Given that Asia is still getting richer and that tastes are not going to change overnight, there’s probably a case for a moderately high gold price based on this continued demand but as a gauge of fear, the pant soilers are about 5 years late to the parade and it starts to show. Good.

    And regarding tastes, they may change. So a price forecast based on actual end-use demand for jewellery may not be a sure bet either. Case in point, diamonds, another kind of glittery bauble, have been going a bit sideways versus colored gems for the past five years or so, based on price and taste. So, nothing is forever.

  20. Frwip says:

    Oh, and for a nice case of full-on frontal goldbuggery, this one hits all the tick marks

    http://blogs.telegraph.co.uk/finance/thomaspascoe/100024081/the-gold-price-crash-is-further-evidence-of-market-rigging/

    Currency debasement. Check.
    Central banker conspiracy. Check
    Paper gold vs physical. Check.
    And so on and so forth.

    But there’s an argument I’ve never seen before :

    While Cyprus is being forced to dump “excess” gold in order to meet the ever escalating bank bail-out bill, its whole holdings are worth only $750m, hardly enough to move one of the worlds deepest and most liquid markets to this degree.

    WTF? Gold, a deep, liquid market? Compared to what??? That news to me…

    • NMR says:

      I lived and worked in the UK for separate periods in the early 60′s/late 70′s. In those days the Telegraph was a very good newspaper, conservative but grounded. Now it belongs two brothers called Barclay who are tax exiles and are sort of sub Adelsons and the entire content of the paper is essentially WSJ op ed page. It’s full of crackpots like this guy opining on the Euro’s imminent demise, supply side economics, goldbuggery, the sanctity of Margaret Thatcher (they also own the Ritz where she lived out her last days as their guest) and numerous other off the wall topics. On your other point I do think the demand for gold jewellry will trend strong in Asia which is getting richer so this will probably provide a bit of a floor so I don’t expect to see a early 80′s two thirds loss of value but 1250 is quite possible as GS forecast by 2015 although it could happen sooner.

    • Saxifraga says:

      The Telegraph is a paper for climate change deniers and fools.

  21. bobnoxy says:

    Look, we get it already. You missed the only real rally of this new century and are working overtime to rationalize it to your clients. Face facts, gold and silver rose 500% since 2000 while stocks, which conforms to your religious beliefs, have been a dead loser in real terms.

    The Fed jumped in with activist measures to boost stocks. Where would they be without all the QE?

    So you’re embarrassed, pissed or in denial at missing out on the real rally. You take the more extreme, easily arguable rationales for owning gold and make those who’ve made a lot of money look like crazies, and you’re no crazy, so missing out was the more rational approach. You should be forgiven.

    It can easily be argued that your reasons for not owning any, though I do seem to remember your getting in right about the peak in 2011, correct me if I’m wrong, aren’t worth a damn.

    No, gold has no P/E, no earnings statements, no dividends. Neither does gold, a Picasso, that D color 2 carat diamond you put on your wife’s finger 20 years ago, that fat house in The Hamptons you’ve always coveted, or that original ’63 Corvette. So frigging what? What’s done better over time?

    We’re talking about two different asset classes, valued much differently, but you just can’t separate the two, rationally. You have your bias, and I have mine.

    Where are the customers’ yachts? How many people do you know that credit their investments in stocks and mutual funds with generating their wealth? I mean retail buyers.

    I’ll keep my gold and silver coins, farm land and collectible whiskies. Keep your stocks, and good luck with that. I could hammer on you for sticking with an asset class that sports more long time losers than winners.

    But really, what do I gain from doing that? And what have you gained by ridiculing gold buyers? Is there a point in all of this?

    Is Jim Rogers a moron for advocating holding gold? Marc Faber, Jim Grant, Stephanie Pomboy? The company we keep. You stick with Abby Cohen, Cramer and Jeremy Siegel. Let’s check back in a another five years and check the scores.

    • Hardly.

      I rec’d Gold on CNBC when it was $300 400 (about $43 GLD if memory serves). We stayed with that trade until it hit our upside target at $1350 where we sold a chunk. We continued to scale out, and I recomended selling it on any spike towards $2000 in a room full of Gold Bugs in 2011. Let me also point out that I was (very publicly) short AIG, BSC, LEH FNM/FRE. And I made the turn to cover shorts and go long in March 2009 (also publicly).

      I have never been a perma anything or a one way trader like you GoldBugs.

      You got this completely wrong. Why would you bother fact checking? So much easier to stick with your jihadist ideology, or just make crap up. (I don’t expect religious zealots to look art facts either)

      Sorry, but traders who make up their own reality ultimately get what they deserve.

      • bobnoxy says:

        That was fun. So, am I banned, or can we play again sometime?

      • We can play anytime. Visit me the next time I am down in St Peterburg (I wont go to Tampa Bay, its a shithole) and you can show me your P&L and I will show you mine !

      • golden raccoon says:

        Your memory is faulty, and your fact checking quite lacking … GLD has always traded at a tenth of the price of an ounce of gold, minus a 0.4% annual deterioration due to fees (thus it currently trades at 96-97% of the price of an ounce of gold). It began trading at ~$45 in November 2004 when gold traded at exactly 10x that amount, and never traded below $40 (i.e when gold was below $400 an ounce, GLD did not exist!). [EDITOR: GLD was 41.02 in Feb 2005]

        While I agree wholeheartedly that gold is not an investment, after a 30+ year career in the investment business, the last half of which was as an equity analyst at one of the largest money managers in the country, I have ~80% of my entire net worth in gold, which I view as the best form of cash. I wish I could “invest” my money in entities which produce real wealth (goods and services), rather than paper representations of wealth, but what you and others who denigrate gold fail to see is that due to central bank gross irresponsibility, all investments are wildly overpriced relative to steady-state levels, which the central banks refuse to allow to happen. And before you go on about P/E levels, earnings, and dividends, ask yourself what has happened to the earnings and dividends of Icelandic, Greek, Irish, Portuguese, Spanish, and soon to be Cypriot businesses. I’ll give you a hint … they have cratered, as have their respective investment markets.

        If you’re truly convinced we can run trillion dollar deficits, print a trillion dollars annually out of thin air, and run $600 billion dollar trade deficits as far as the eye can see with no consequences, good luck with that. While it is not my preferred outcome for the accumulation of my life’s savings, until some level of sanity returns to the minds of our monetary and political representatives, I’ll take my chances with gold.

      • GLD was in the low 40s; I don’t recall where Gold was when that appearance occurred. I can tell you over $300 was where gold suddenly got interesting then

      • franklin says:

        What you call “central bank gross irresponsibility” I call a smooth and steady Flow of Funds log chart. Do let me know when they start printing too much money and it shows up as a spike there.

        –franklin

    • NMR says:

      Put your trust in Jim Rogers. He’d NEVER talk his book.

  22. miraje182 says:

    The list you mentioned ” a Picasso, that D color 2 carat diamond you put on your wife’s finger 20 years ago, that fat house in The Hamptons you’ve always coveted, or that original ’63 Corvette.”

    None of those things are INVESTMENTS. Sure the price can go higher, but it is on pure speculation. You need a bigger fool to win at that game, not an actually improvement in the thing you own.

    Don’t compare stocks/bonds to your gold, silver coins, and collectible whiskies (farmland is a real investment becuase you can produce cash flow from the crops), because owning them to hope they increase in price is the same as gambling.

    I bet you think Bitcoin is a good investment too…. Up about 1000% in only a year…

    • socaljoe says:

      Gold is not like a Picasso, that D color 2 carat diamond you put on your wife’s finger 20 years ago, that fat house in The Hamptons you’ve always coveted, or that original ’63 Corvette. Gold is fungible, liquid, portable, has low transaction costs, no maintenance, and it’s value does not depend on its quality. It is more like money… the difference being that money is an excellent medium of exchange, but poor long term store of value… while gold is good long term (decades) store of value, but a lousy medium of exchange.

    • NMR says:

      Investments tend to exist in the eye of the beholder. Diamonds, real estate and classic cars can be and often are investments. The bigger fool argument applies equally to facebook stock surely. Investments fructify from a combination of capital appreciation and income production. The problem arises with the goldbugs almost cult like belief that gold is somehow different than other asset classes. It isn’t. And so you get rather asinine contributions like the one above that BR shot down and gets a one line silly rejoinder. If you timed the market perfectly you made a lot of money in gold in 00′s just like you did if you timed Cat or JD stock in the spring of 2009. On the other hand if you piled into gold in mid 2011 you’re hurting and could hurt a lot more.

  23. mad97123 says:

    The 12 rules for QE-ism

    The reaction to the equity market’s rise has produced some astonishing rationalizations about QE and the benefits of government deficit spending. Given we are in uncharted territory and making this up as we go, the rationalizations seem less like a debate and more like a religious cult.

    1) Stock prices can never fall given the Bernanke Put
    2) There will be no unintended consequences or we would have seen them by now
    3) There is no lag between money creation and inflation, and the Fed will be able to predict when money velocity will pick up, and make an orderly withdrawal
    4) Earnings will never revert to their historical average as a percent of GDP because QE and deficit spending will be never ending
    5) Interest expense on the debt will never increase because the Feb would not allow that to happen
    6) 2% dividends are a good return, and paying more than 2X book is investing, not speculation
    7) QE is capable having real, stimulative, and beneficial effects for the economy and unemployment
    8) The Fed knows what they are doing now, even though they had no clue before
    9) Crucifying savers on a cross of ZIRP is the best we can do
    10) The moral hazard created by bailing out the bank and politicians is the price we have to pay, it would have been so much worse without it
    11) QE to infinity does not create uncertainity, it gives business confidence that the Fed has their back (what do they really know that keeps them printing?)
    12) I will find a chair when the music stops, but until then I have to dance

    As Dallas Fed President Richard Fisher said – …”we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.”

    You don’t need data to navigate these waters, faith in the Fed will get you thru…..

    • The key difference: Both Stock and Gold proponents have made the claim that QE would drive prices higher.

      Stock owners were correct, and Gold owners were terribly wrong.

    • franklin says:

      13) Gold prices will drop and all that money selling will chase stocks higher. Check.

      –franklin

  24. btowers says:

    Yes, great list (although I will continue to buy on the way down).

    Serious question, BR: what is a safe, long-term store of value?

    It’s not oil, it’s not stocks, it’s not land, it’s not cash. All have had enormous drawdowns over the years. The truth is, there is no safe store. It all depends on price, and beliefs, and events. A similar list to the above could be constructed during the NASDAQ bubble, or the housing bubble, or the peak-oil bubble.

    • Land.

      Not sure what else really fits your bill — it seems to be one or the other

    • socaljoe says:

      Yes, oil is a good long term store of value… it’s
      marginal cost of production is rising… global demand is rising…
      both trends have been in place for 100 years, short term
      fluctuations notwithstanding.

    • DiggidyDan says:

      Maybe land with a large self-sustaining catfish pond and no-maintenance groves/orchards, walnut trees, etc. The food benefits may outweight the taxes and upkeep.

  25. flakester says:

    If someone shorts or hedges gold as well as buying, are
    they still a gold bug?

  26. Pete says:

    This: ” BR: what is a safe, long-term store of value?” got
    me thinking. It all depends on your view of the future. If you
    think the entire economic structure of the world is going to
    collapse, then gold, canned goods, guns and ammo, booze, tobacco,
    other addictive drus are all good investments. Whe the world falls
    apart then you need stuff you can trade with other individuals (or
    use coerce other individuals to donate stuff you want). If you hold
    a more conventional view then it becomes more complex, and there
    are zillions of pundits offering advice. One thing to note is that
    “investments” like currency or gold or cash in the mattress take
    money out of the pool that gets traded around. It really is
    unabashed speculation. If you invest in your cousin’s honest
    business venture, it may be risky, but there’s not doubt that it
    will bring someone else some benefit. Any investment is a gamble of
    sorts. Everyone has to make their own decisions about where to put
    their acquired resources. I think there’s usually a win-win place
    where the payoff may not ultimately be in added measurable economic
    value, but in added security in your community, however you define
    that.

  27. jharry3 says:

    The best way to prove to the goldbugs they are wrong is make gold “legal tender” again and let it compete on the open market with Federal Reserve notes. Naturally gold will fail and people will learn its only shiny metal.

  28. Monty Capuletti says:

    BR-

    Some good points- Would add THE critical rule of investing that gold “bugs” ignore- 1) ALWAYS question your thesis- Where could I be wrong? Never saw/read/heard it from any of these sites until last day or so…I suppose that’s what happens when most of them are at it not out of studied analysis or reason or even to make money, but to prove that they’re “outside” the system and above the fray, and somehow more righteous or honest…We’ll see..

    Also- noticed that your 2010 post on gold referenced Monetary Base/ Fed Gold Holdings and Gold/SPX ratios- Interesting that both of those are at much better levels today than they were then, and even close to historical lows (MTM Fed gold holdings vs Monetary Base) and yet you see fit only to stick your thumb in the eye of gold bugs. Strange..

  29. gloeschi says:

    point 12 – “Indian & Chinese know gold”.
    Maybe they really know a thing about it. Last time I visited India (1995) the rupiah was 19:1 to the USD, now 54:1. Lost 64% since then (measured in a currency which itself has lost purchasing power since then). Gold went up from 6,600 to 75,000 rupiah. People living in (seemingly) stable currency areas do not understand what it means to live with an unstable currency. But why do you fault the Indians for doing the exactly right thing that allows them to preserve wealth?
    Pure fiat currency system is 40-something years young – and experiment in view of 2,700 years of gold standard. And it seems we can’t handle it very well, since we had to try another experiment (QE) on top of it. So who are you to dismiss those who think this might end badly? On manipulation: I think you’d agree that certain stocks at certain times are manipulated by HFT. So why *wouldn’t* there be manipulation in the gold market, too?

  30. rp says:

    Is this a duplicate. Sorry, not sure.

    You guys don’t get it. This is how the currency system works. Gold is the currency of last resort. When there is a crisis in the reserve currency, gold is nominated along with alternatives. Look at this chart:

    http://i.imgur.com/hyySyHi.png

    The US had a deflation crisis. Fed printing doesn’t help. The problem is, America has no savings. Who has enough savings to end the crisis? The currency market knows, and it nominated the Japanese Yen at 77.5 to the dollar. It also nominated Gold – the currency of last resort.

    So the gold bugs are CORRECT that gold is a currency. It is the currency of last resort. DON’T VOTE FOR GOLD! The whole world just ends up fighting over Gold which is stupid. See WW2 and WW1. The gold standard is a standard for WAR! It is a barbarous relic indeed.

    Instead, the Japanese voted to sell their gold and spend Yen to fight deflation for the entire world. They of course have more gold than anyone, and we see on Bloomberg the Japanese rushing to sell gold. They know what they’re doing – the race is on for the next BIG BULL MARKET and it’s Japan!

    Good bye carry trade, good bye cheap money. Japan is in a MONSTER BULL, and once it is recognized, markets AROUND THE WORLD will crash to make way for the Japanese bid!

    Interest rate shock!
    Shinzo Abe = Ronald Reagan

    And notice the twitch in the market from the Senkaku dispute. China tested Japan, and the price was renegotiated in America’s favour. America backs Japan, and that’s IT. DEAL DONE.

    The Japanese bond market will crash of course, but the Japanese have already said they will monetize everything. Just like America did in the 1950s when they had all the gold.

    So don’t knock the gold bugs too harshly. Much of what they say is absolutely correct if leadership in the world ever broke down. Give praise for the Japanese people, who have voted for change. Their savings have earned them the right to lead the world, and they took the bid with America’s backing.

    Meanwhile, Europe was trying to confiscate Gold from Cyprus. It’s THESE GUYS that don’t get it. You can’t lead the world that way! The Gold bugs at least understand the “worst case scenario”.

    It’s another 30 years of peace and prosperity, thanks to the Japanese. And if we manage it well, it could even last longer than that before the stagflation crisis hits Japan. So the first half of the 21st century belongs to the Japanese, and everyone else had better get their house in order. Most of all the US. Reform is imminent! I predict capitalist China in 10 years.

    Who will be asked next? Obviously we hope America get a bid, and Japan by default will be asked to tighten in 30 years to crush inflation. But might the world also nominate China, India, or Brazil? It depends on what these countries do now, and how well they work within the system.

    So to recap:
    1) gold is a currency – TRUE – it’s the global reserve currency of last resort

    2) the price of gold can not fall – FALSE – it just fell because the world agreed on a solution

    3) gold price rises in defiance of manipulators – TRUE – there was a crisis not being dealt with. Americans could not agree to spend and monetize to that extend. Too many problems. The market nominated an alternative and America passed the torch. America will now rebuild itself anew while the Japanese spend to drive the world.

    4) the world MUST return to a gold standard – let us hope not – The gold standard should really be called the war standard. But in a sense, the gold standard is always there underneath the monetary system. It moves to the forefront in every reserve currency crisis. And whoever has the gold and sells it gets to lead the world. Their reward is a great bid on global capital markets!

    5) Central bank printing can only drive gold up – FALSE. The Japanese are about to monetize so much Yen debt, you won’t even know what a zero is. And the gold price will fall because the crisis is over.

    6) Gold works good or bad – FALSE. Gold only works when things are bad, and savers are being screwed by the global reserve currency. If you are a prudent saver you will recognize this and save gold instead. Then you get the best price ever on global markets, or you preserve your savings in a war.

    7) Gold will survive after the world economy crumbles – TRUE. This is gold’s ultimate function. It is the global currency of last resort. Hold gold at the peak until you are satisfied. It’s great insurance, which you’ll pay for as it crashes. Hold a bit of gold and sell into the decline if it helps you sleep at night.

    8) Never admit it’s a suckers bet – TRUE. It’s insurance. You have to pay for it. Pick your target and sell to pay. Buying after the decline is for idiots though.

    9) Gold is a rejection of government and fiat management – TRUE. If you don’t like monetary policy because you’re saving and getting the shaft, buy gold. If it’s bad policy causing problems, others will buy too.

    10) All gold discussions must contain ominous forecasts – TRUE. That is what the gold price is telling you. Countries of the world: FIX THIS OR ELSE.

    11) Gold is always rallying in one currency or another – FALSE. It’s a commodity that confuses people every 30 years. Once people understand the system, maybe we will fix the problems in advance. Then gold might never rally.

    12) China and India know the value of gold – FALSE. They obviously don’t understand what just happened.

    • franklin says:

      What you call no wealth I call $60 trillion in assets producing the highest amount of product ever! But go on claiming we are broke.

      –franklin

  31. rp says:

    I wanted to add: “China & India know the value of Gold”

    I was wrong to say they don’t get it. They do. They are buying gold because they doubt their country’s monetary policy will be fair to them when global interest rates rise and cause a brutal recession. The expect a massive devaluation and inflation, wiping out the savings class.

    If gold crashes in your currency you should be very happy and get ready to invest.

  32. andrewp111 says:

    When gold was unable to get past its highs a couple of years ago, it was bound to go lower once leveraged speculators were forced to sell. I don’t know it was actually speculators in gold that sold off – it could have been speculators in other stuff who also had gold that could be sold to meet margin calls.

    The price of gold seems to be driven by real interest rates though. If the sell off in gold persists, it could be a very ominous sign for the economy. Every central bank on earth is printing like mad. If those central banks can’t jumpstart inflation with all this printing, the next big move is likely to be down – for everything, including gold. Unless the central banks reach maximum desperation and start buying up all the gold as a way to inject money into the economy and jumpstart inflation.

  33. Graham d'Odd says:

    Great Post Barry Ritholz !!!

    Quite thought provoking for all those people who were going to get rich speculating in Precious Metals, I’m sure !

    The standard currencies are obviously much safer & less Volatile – Dollars, Euros, Yen etc (OK, maybe not Yen or Euros – but you get my meaning, right), precisely because they are 100% backed by the governments of the world (well, except for little Cyprus’ Euros…).
    Their value is tightly controlled by the world’s smartest economists at the world’s central banks.
    This group of people were smart enough, to sell their (our) gold when it was worthless at ~300 USD, and buy it again now that its more valuable at >~1000 USD. See, so smart, that’s what I mean!

    Best of all, I think that your TIMING with this piece was perfect
    – Had you posted this article in September 2011, or any time near the top price, nobody would have believed you.
    – But now, your article reflects the Markets Sentiment perfectly – so it really resonates with us, your readers !

    My only question would be, then; Did this article Mark the Bottom ?

    Thanks again for such a great, thought provoking, Parody of Those Gold Bugs

    • carchamp1 says:

      The last time a gold bubble popped it took 20 years to bottom. I think we have a ways to go.

  34. ElSid says:

    Nice working of the straw man concept. This post is an absolute textbook straw man (which I’ll admit is the blogger’s prerogative). It’s definitely not a successful attempt at humor, given your move to more and more ad hominem. Love the “Jihadist” usage to respond to posters – it is telling of how people feel about people who try to come at things from another perspective. It’s what Tea Party people call people who voted for Obama.

    It’s important to notice that you don’t response to people like Sustainable Gains.

    I just want to keep repeating one fact – one also has to pay storage fees for dollars (to the tune of about 2.0%, real, currently, if one accepts the CPI), just not explicitly. And you have to pay that even if it’s not stored safely. People who can’t think in real terms in this upcoming world are in trouble.

  35. Willy2 says:

    Yes, I am a goldbug but most of these goldbuggery rules are nonsense.

  36. [...] swoon has triggered a good deal of schadenfreude, some subtle, some less [...]

  37. [...] on 18 April 13 Gold’s swoon has triggered a good deal of schadenfreude, some subtle, some less [...]

  38. Orthodox says:

    Whenever an emerging economy has a huge middle class emerge, whatever they like to buy jumps in price. Have you noticed the stories about milk powder sales being limited in countries spread all over the globe? It’s because Chinese are buying up all the milk powder and shipping it to China.They like jewelry in China, but many still don’t have the disposable income needed to buy it. If the middle class grows as expected, hundreds of millions of customers will be able to buy. That doesn’t say anything for gold one way or the other because who knows the total picture, but status symbols tend to be irrationally valued. Look at status goods in the U.S. such as college education (particularly Ivy League), cars, houses, etc. The price goes up and up, even though there really isn’t more value. So if the Chinese and Indians do value gold more highly, they may have the earning power to push prices up. And they are already 50% of global demand.

  39. tim73 says:

    These “end of the world” goldbugs are funny. There store gold, guns and ammos but most likely would die of lack of antibiotics or when they run out of diabetes or hypertension pills, if the end of the world really happened :) Or his wife dies because nobody nearby knows how to do a Caesarean section or appendectomy and only possibly available doctor is 100 miles away.

    Real survival skills are not what you own, it is what you know and can do. Those skills would be really golden. How to hunt, how to treat wounds and many other skills. They do not need any money, they do not necessarily need even a gun. They can make their own weapons, animals traps, how to prepare different animals for eating, make shelters etc etc.

    • petr aardvark says:

      well said.

      I love the mad max reference in the article. Not that it was an over the top movie anyway, they all drove guzzlers and fought for a few drops of gasoline. I didn’t see anyone fighting for gold in the movie.

      The CBC podcast ‘the invisible hand’ has a great discussion on gold versus chickens. You’re better off having chickens because you can always raise more and eat the eggs.
      My dad who recalled the end of WWII in Europe, they traded cigarettes for everything.

  40. hidflect says:

    1.
    For a gold hoarder, the only time he’ll ever want to trade it in for “that worthless, Illuminati scrip, dangnammit (ptooee..)” is exactly when the metal has the strongest/ highest value against that paper marking the peak paranoia point he feverishly holds regarding fiat money. Faced with that gold-is-up-so-cash-will-collapse logic, he’d NEVER sell for cash unless forced by financial circumstances. Given also that you can’t trade gold for chewing gum or petrol, it becomes meaningless to hoard the stuff. The hoarder and his small pile of yellow metal are doomed to orbit each other, locked in a spinning, un-intractable embrace like a binary star system until the end of time (or death, whichever first).
    OR, he finally gives up, becomes a hypocrite and quietly sells the gold for the same stuff he’s been calling toilet paper for 10 years..

    2.
    If individuals have cash then they can lend it to people and earn income by, say, depositing it in a bank or taking a stake in some small business. You cannot do that with gold. Unless you turn it into cash. But then you lose ~4% in exchange fees right away. Cash? 0% fee to move around (if you’re smart).

  41. franklin says:

    No, Mr. Ritholtz, Rule number 1. The US is Weimar Germany: Pay no attention to the fact that Weimar collapsed because of the gold standard as they owed 800% of GDP payable in gold. Point out the mass printing while ignoring that gold was the reason it did no good and eventually failed.

    –franklin

    • You confuse a forecast (US is Weimar Germany) with a current criticism on rationalizations for bad price action.

      And for others who you want to understand why the Weimar collapsed, go read LORDS OF FINANCE — you cannot ignore the role War Reparations paid in the collapse of Germany and expect anyonme to take you seriously franklin.

      • franklin says:

        “800% of GDP payable in gold”, a.k.a. War Reparations. I see I still need to work on that sarcasm.

  42. franklin says:

    Oh, I got another: By gold because fractional reserve banking always failed (just like it did repeatedly when fractional banking was based on gold as currency instead of currency as currency).

    –franklin

  43. [...] The 12 rules of goldbuggery – The Big Picture [...]

  44. VennData says:

    As drones continue to fly over America and kill Americans, depleting the population of voters who vote the right way, the only way to protect yourself from enialation is gold. And a little tin foil helmet.

  45. [...] led to my snarky tongue-in-cheek post, 12 Rules of Goldbuggery. I expected it to be a laugh but it surprised me just how viral it went. The pushback is an [...]

  46. [...] Since I last posted, things are interesting in the market.  The top story since last post was Gold.  Amazing how it has the dropped in price.  Gold miners have also been amazing to watch.  Year to date, GDX is down a whopping -62%!!  I am not a “goldbug” nor do I believe that we are returning to the gold standard any time soon, but I do believe you should look at Gold like you would own an antique car, or painting, real estate, etc.  I think the one thing that goldbugs miss is that the only way we even get close to the gold standard again is when the entire worldwide financial system implodes and we are in WW III.  Not to say there will be some sort of gold backing currency in the future but the politicians, banking cabals and central banks will never, ever allow it.  Thus, a war will have to happen to bring about this kind of change.  This is where I disconnect from the “goldbugs.”  They are looking for this – they actually want a system that goes back to the gold standard no matter what the cost.  The cost, though, may be their lives and the lives of their families.  It makes no sense.  This article about Gold really does a good job about gold and its importance – 12 Rules of Goldbuggery. [...]

  47. Graham d’Odd says:

    BRILLIANT CALL B.R.

    They say no-one rings a bell at the top or bottom of the market, but it seems that you have made that clarion call, maybe your BEST CALL EVER, no ?
    You have crystallized all the hatred & sour-grapes against the hugely successful & long-lived gold bull market in one place, & it appears you may have timed the bottom of the crash – TO THE DAY – BRILLIANT !
    Paul Krugman – Nobel Laureate – & Standard-Bearer for the ‘New-Keynesian’ movement heartily endorsed your post – so you are in good company too !

    As per my earlier post, I did indeed go down to the local bullion seller, to buy some Gold coins, based on your contrary call.. But they were all out of coins – & it now appears to be getting that way in many places around the world ! Not least in JPMorgan’s Vault !

    As in investment professional, could you explain to us amateurs, why there are gold coins available at the top of the market, but not at the bottom?
    One might expect, when the price is bid up by demand greater than supply, that there would be no gold coins available; but when the price is crashed by massive supply, much greater than demand, that there would be plenty.. Yet, in the Gold Market, it is the other way around ! WHY ?
    From what I have read, this seems consistent for gold supply to be severely lacking when its market bottoms, as is the case now, though not an any other market ?

    Also, I would most appreciate it if you can help me to pinpoint where we are in the cycle shown by the following charts ?
    http://www.sharelynx.com/chartstemp/DowGoldRatio.php
    http://nowandfutures.com/images/dow_gold_oil_crb1800current_rev.png

    Again, Great Bottom Call! Possibly your best ever.. Maybe the one you will always be remembered for !

  48. [...] While lots of readers, commenters and emailers “got it,” a great many did not. I was accused of being a shill for Wall Street (never), a perma Bull (Ha!), and a gold hater (I am not enamored of the money losing gold narratives). [...]

  49. [...] of Gold’s ongoing rise. Despite what some goldbugs have laughably said about me, I am agnostic about the metal, except when it is losing people lots of money. I do detest the narrative driven sales pitch that [...]