In a piece published in’s on Friday (Is Gold Nearing Capitulation?) the selloff in gold was described as “a contrarian’s dream scenario.” John Hathaway of Tocqueville Funds wrote in Barron’s: “The evidence shows strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in the mining shares. It seems like a contrarian’s dream scenario to us.”

I am less sure than Mr. Hathaway is.

He cites a variety of factors as “positive fundamentals” for gold: negative real interest rates, worldwide quantitative easing, and governments’ new confiscatory inclinations, as demonstrated in Cyprus.

To which I am compelled to point out three things:

1) Gold had a huge rally came as the dollar collapsed 41% from 2001 to 2007. The Dollar is now at a three year high. Why would that be a fundamental positive for Gold?

2) Quantitative easing has been going on int he US for 4 years, and worldwide for a while. What is the basis of Hathaway’s assumption that this is a net positive for Gold? We have so few examples of this phenomena that I do not understand his analysis here.

3) Cyprus is a terrible example of “governments’ new confiscatory inclinations.” Readers need to recall that Cyprus banks were paying 6% in a zero interest rate environment. These were not “risk free checking accounts” but rather high yield, high risk trades. This “confiscation” as described by the usual paranoics was nothing more than a capital loss in a high risk trade. (about 16 months of interest payments).

We looked at Gold as a trading vehicle in the past, and identified the many ways it is different than assets like equities or bonds. Back in 2011, we noted that Gold is a trade, not a religion. During that presentation at the Agora conference in Vancouver, we discussed how commodities spike and collapse versus how equities roll over and break trend lines.

History shows Gold trades differently than equities. Why? It comes back to those fundamentals.

It has none.

This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.

I do not want to engage in Goldenfreude — the delight in gold bugs’ collective pain — but I am compelled to point out how basic flaws in their belief system has led them to this place where they are today.

Gold does trade technically, and is especially driven by the collective belief system of the crowd. When that falter, well, you know what happens . . .


Gold falls 10% this

Source: FT Alphaville



Everyone Should Be Thrilled By The Gold Crash  (Business Insider)

Tax Time Takes A (Big) Bite Out Of $GLD $GC_F (Stock Traders Almanac)

God is Making Gold Crash to Test Your Faith   (The Reformed Broker)

GARTMAN: In Four Decades Of Trading Gold, I Have Never Seen Anything Like This Crash (Business Insider)

Charts du jour (silver and gold)  (FT Alphaville)


Is Gold Nearing Capitulation?
John Hathaway
Wall Street’s Best Minds  | Barron’s April 12, 2013

Category: Gold & Precious Metals, Really, really bad calls, Trading, 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.

76 Responses to “What Are Gold's Fundamentals ?”

  1. gfeirman says:

    This is an interesting philosophical debate. Your claim essentially amounts to the idea that gold has no fundamentals. But I think this misses the point.

    The idea of fundamentals themselves depend on a unit of account. The fundamentals of a company are calculated based in $. What are the fundamentals of $ or any other currency? Your argument that gold has no fundamentals could be applied to any currency: The $, euro, Yen have no fundamentals. So wath?

    Yes, gold is not an earning asset. It is an alternative currency or unit of account. When the primary unit of account, $s, is increasing in supply or confidence is being lost in it, gold goes up.

    Therefore it’s wrong to say that there are “basic flaws” in gold proponent’s belief system. The same flaws would apply to anyone who “believes” in the $, yen, euro, etc….

    • cmcristi says:

      Is not it that the fundamentals of a currency are represented by the underlying assets of that economy(ies) that uses that currency to denominate its real, physical assets/products/goods/services/etc? A growing economy is a reflection of goods and services that find demand (locally and worldwide) thus that demand will need to first to get the money (by exchanging whatever to that currency) to buy them, leading to a relative appreciation of that currency against others, assuming a constant money amount.
      Gold does not measure anything relevant for the economy.

  2. sureseam says:

    There have been a lot of strange belief systems around gold – to be sure. Platinum has much of it’s monetary significance as a unit of account and it is being consumed (dissipated) in a way that gold is not. Just a thought.

  3. Petey Wheatstraw says:

    Gold has been fundamental for a long, long time.

    In answer regarding the gold price move in BR’s recent good/bad synopsis for the past week, BR pointed out that gold’s drop in price was a good thing, in essence, because it reflected a more stable economy (at least, that was my take-away from his answer).

    I’d feel all warm and glowy about it if there were any reasons to believe that the fundamentals of the markets and the broader economy weren’t so damned dishonest.

    No matter how one looks at it, the rebound of the markets couldn’t and wouldn’t have happened if our allegedly “free” markets had been left to their own nature to reach some kind of stability. Instead, we had dishonest accounting, QE, and the further legitimization of the kleptocratic elements of our political/financial system (see BR’s earlier link to “Is the Fed Handing Out Valuable Tips to Insiders?”). Now, we declare, with all sincerity, that the problems have been fixed and that happy days are here, again.

    I have a real problem believing that the results of these “fixes” will not end up with even larger problems down the road.

    By all appearances, everything is getting back to “normal.” I have a feeling that this is the same kind of “normal” that dysfunctional families rely on to perpetuate their sick relationships.

    As I have said, too often, in the past I’ll toss my gold as soon as the Central banks take their gold holdings out back and throw them into the dumpster. Until then, I’ll keep watching what they’re doing, instead of listening to what others are saying.

  4. [...] What are gold's fundamentals?  (TBP) [...]

  5. bobnoxy says:

    Gold has no intrinsic value? Well, what’s the intrinsic value of the dollar when the Fed is printing them in unlimited quantities, at virtually no cost? What’s the intrinsic value of the yen with the BOJ promising to double the currency in circulation over the next two years?

    Gold has ”no cash flow, no earnings, no yield”, but has outperformed stocks that have all those for the past 13, and the past 43 years. Why do those factors mean anything? All of those same arguments were heard in 2000. How did that work out?

    • The fundamental value of the Dollar is the government’s ability to raise taxes and support a standing Army.

    • BenE says:

      I laugh when it is pointed out that gold has almost no intrinsic value and someone counters that dollars don’t have any either.

      Of course they don’t! They are used as currencies and currencies are not suposed to be used for long term saving and investment only for transactions and shorter term contracts. Good currencies are designed to lose value with time specifically to prevent people using them as savings.

      It makes sense to use gold, dollars or bitcoins as part of a transaction. I would say that dollars are much better for it since they have a much more predictable, centrally controlled slightly declining value based on a diversified basket of goods. But if someone is willing to accept gold or bitcoins instead of dollars, why not.

      Currencies become problematic when people try to use them as investment or savings, since they have almost no intrinsic value (gold intrinsic value is 1%-10% of its price, paper is pretty much 0), their price is determined by market whim and if not centrally controlled, they risk huge price swings since they have nothing real to anchor to. Downward price swings often come in the aftermath of bouts of hoarding which cause bubbles.

      This problem is particularly bad for gold, but can also happen to currencies when central banks lose control such as in a liquidity trap situation or in hyperinflation conditions.

      The lesson is: don’t save or invest in currencies! Use something that has more real intrinsic value.

  6. streeteye says:

    In the long run gold has a zero real return, and a lot of volatility.

    But when everything else is down big, gold is up big more often than not.

    So a small amount of gold is a good diversifier in a balanced portfolio, and bought in a timely manner, usually not a losing proposition in the long run.

    It’s a matter of time frames. In the short run, central bank easing is a risk-off development, boosts stocks and bonds and negative for gold.

    In the long run, Hathaway has a point. It’s crazy that the BoJ eases, the yen loses 25% of its value, and Mrs. Watanabe decides that because gold is up in yen terms, that means it’s a great time to sell.

    • Gold fell less than stocks in 2008, but it did fall substantially

      • streeteye says:

        volatile and imperfectly correlated, hence ‘more often than not’.

        GLD fell sharply in the crisis, but was actually up on the year in 2008. (86.52 v 82.46)

        Back of the Excel envelope calcs – real return correlation of gold to

        stocks: -15%
        t-bills: -27%
        intermediate govt: -34%
        long term govt: -23%

        more of an inflation hedge than a growth hedge (+29% vs CPI)

      • streeteye says:

        If by ‘investment’ you mean ‘real return investment’, esp. ‘equity-like real return’, I agree 100%

        Bonds are not a long-run real return investment. From 1926 to the early 80s the real return of bonds was 0, it’s now caught up to about 2.5%.

        Assuming trend growth continues (below-trend demographics and productivity notwithstanding), stocks are the only long-run game in town. Still, it’s not unwise to have bonds as a deflation hedge and gold and TIPS as an inflation hedge.

  7. cmcristi says:

    “Gold cannot be an investment”. I think I see your point. You are defining “investment” as the rational act of buying assets, involve them in an economic activity in order to make a profit.

    In that sense, gold is not an investment just as buying a Picasso is neither. Another example is buying wine and collecting it for its premium when it gets older. This could be an investment because the wine suffers transformations in time that grow its value. Gold does not, a painting neither. They grow in value only because some people say they are worth the listed price.

    • econimonium says:

      I think, cmcristi, that the point is that gold isn’t something like, for example, a stock or a bond where you can tie back the value to a set of calculations based on fundamental data…that data being a rate of interest or coupon, or whatever your favorite metric for valuing stock which ultimately comes back to earnings. So there are *objective* numbers there. For gold there are no *objective* numbers except in the commodity sense. So, therefore, there’s something else going on – goldbuggery (I love that term because it’s exactly what happens to these people in the end).

      There are lots of things priced in this manner as you state – a Renoir, red wine, porcelain, heck even baseball cards. But there is no fundamental there, it’s only a market that may or may not exist in the future for the class of item and that’s based on people’s attitude and taste at the time you go to sell it. Gold is no different than that, except as a commodity used in manufacturing or jewelry. So goldbuggery is a lot like a religion, not a dispassionate investment based on numbers. Although, I have to admit it is fun to make some coin off of others when it’s on the way up, isn’t it? That should be a chilling statement that basically says “We’re playing musical chairs with you, have fun you goldbugs fighting for that last chair when the music stops”

  8. Al_Czervik says:

    I am always suspicious when investors mention “intrinsic value”, as if you can turn something over to find-out what the *real* value is.

    My area of expertise is investment-grade real estate. Nobody ever uses the term “intrinsic value” in talking about commercial property…stated very loosely, real estate investors define market value as whatever buyers will pay for something.

    BR said: “Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.”

    For that matter, anything that does not provide a current yield commensurate with the risk is to some degree a “greater fool trade”. Any investment made on the assumption of declining rates or increasing PE ratios makes the assumption that investors in the future will place more value on a stream of income (or lack thereof). And cognitive errors are found in all human activities. Gold is not really special in that regard.

    • Al_Czervik says:

      Also, it isn’t necessary to agree with the Armageddon types, Austerians, and gold-backed money enthusiasts to find a compelling case for owning the metal. For that matter, I have a significant allocation to the broad market and I disagree with much of what I read in the WSJ and the financial press.

      As with any investment, a person must think for him or herself and manage risk.

    • zman1527 says:

      Fundamentals for gold? Notwithstanding some of the points made above, here goes:

      1. History: it has been valued by Homo Sapiens for at least 6,000 years.

      2. Beauty. Think that is not valuable? Just ask the Mona Lisa, or is that just pigments and canvas?

      3. Rarity. It is very hard to find.

      4. Durability/indestructibility. Compare to wheat, corn, oil, tulip bulbs, etc

      5. Density of value, still $1350 PER OUNCE.

      6. Universality. The only places it might not have much value you would probably be better off with a spear and loin cloth anyway.

  9. rd says:

    The best thing likely to come out of this is that we never hear about John Paulson being a genius again.

  10. [...] za investici“, tvrdí Ritholtz v příspěvku What Are Gold’s Fundamentals? na svém blogu The Big Picture. Historie ukazuje, že zlato se obchoduje jinak než akcie. Proč? To se týká právě [...]

  11. Greg0658 says:

    Petey and Al – I’ll play along .. agree with both ya’s
    I’m wondering if this lastest drop is to pay taxes on time today .. and just 3 days to Freedom .. booyah

    “Tax Freedom Day 2013 is April 18th. In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 29.4 percent into the year.”

  12. Manofsteel11 says:

    What are the fundamentals of US economy?
    Pension fund obligations and baby boomers’ savings (debt)? Young professionals participation in the labor force and underemployment? Student loans? Infrastructure gap? High yield bonds? National, state and municipal deficits? Large banks? Derivatives? Healthcare and education systems sustainability? Derivatives stability? HFT liquidity and long-term health of equity markets?
    What are the fundamentals of Japan and Europe? Health of currencies? Economies? Demographic? How about China?
    Currency (and other) wars are just beginning. What are the fundamentals of such Macro volatility like?
    Well, the stock market is up and the dollar is up, so this must mean that all is well and gold should go down…

      • Manofsteel11 says:

        Thank you. I am considering entering soon.
        Bought when gold was in the few hundreds and before Lehman – not too bad.
        This is a rational decision. It is for national banks nowadays. It is for those who anticipate that many institutional investors and most retail investors are yet to act given the ramifications of the factual points mentioned above.
        In this vein, I suggest making a note of reviewing this post in 3 and 5 years, rather than in the context of daily volatility.
        I wonder if Goldman is buying now…

      • Gold was kissing $1,000 when Lehman collapsed — not “in the few hundreds”

      • Manofsteel11 says:

        I think it says : “Bought when gold was in the few hundreds AND before Lehman”.
        I appreciate your blog very much and enjoy reading informed opinions.
        This is about sharing a perspective, which may of course be wrong.
        My point: Ignoring economic fundamentals might have a price tag attached to it. Fundamentals might depend on underlying macro parameters and long term investments might benefit from focusing on such parameters rather than occasionally inflated numbers.
        Gold is likely to attract investors if/when all other parameters converge, short-term volatility notwithstanding.
        As somebody wrote today: gold may be the sea retreating before tsunami waves engulf the markets.
        Much success to everybody.

  13. Concerned Neighbour says:

    I may be one of the few critics of the current policy of ever-escalating recurring QE in perpetuity that doesn’t own any gold. It’s an asset with no earnings, no cash flow, and costs money to store.

    I like to invest on fundamentals. And yes, that means I’m SOL for what looks to be eternity thanks to the “pump to infinity and beyond” central banking cabal.

  14. DeDude says:

    Gold is mostly held by people with a certain level of paranoia. As such it is not surprising that when it breaks, it does so fast and furious. Both gold and bitcoin took a big hit last week. They both belong in a circle of people who are confident in their skepticism of fiat currencies and the eminent threat of hyperinflation. Another hyperinflation bet, the 10 year TIPS, has gone from -2.0% to -1.6% in a few weeks. What exactly are the events that have shaken the hyperinflation/”safe money” crowd? Is this just the inevitable conclusion of a slow rush to the exits as people realized that Europe would not implode?

  15. carchamp1 says:

    Excellent piece Ritholtz.

    Remember the last time we had a gold bubble? We both do. It just so happened to coincide with the last oil/commodity bubble. And the last time we learned of “peak oil” and solar panels were all the rage. An Asian miracle/command economy was bubbling along. And our economy was a mess, to put it mildly. (And disco died.) I remember this very well. Times were TOUGH. BUT, recall what happened for the next 15-20 years after that, as commodities deflated. Times were good – very good (…even without disco).

    The deflating gold bubble has, IMO, enormous implications for the future. To me, this is the beginning of the end of the broader oil/commodity “alternative investment” thesis. It’s all a sham. It turns out that buying up gold and storing it in a large room is hoarding, not investing. That this latest bubble occurred at the same time as the deregulation of our commodity markets is not coincidental. Thank you again Wall Street for another huge screw-up. The days when commodities are priced on “investor” fundamentals will be replaced by producer and consumer fundamentals. And with this will come lower prices for all commodities. Say hello to the 80s and 90s again.

  16. louiswi says:

    Forty years ago I asked the smartest man I knew how I should look at gold. His answer was to see it as a dog sees everything. “If you can’t eat it or f#ck it, Pi$s on it”. He went on to say a dog actually considers a fourth thing regarding everything he sees and that is “he plays with it; at least until he becomes bored with it”. I took that as good advice and and in retrospect it has been great advice; this from smartest person I ever knew.

  17. Pointfinder says:

    Re Gold: “It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield.”

    The same could be said about all stocks that don’t pay dividends. They are faith-based purchases.

    Of course in the case of a stock, the underlying company has cash flow and earnings, but the link between those fundamentals and the price of the security is indirect and 100% based on belief.

    Just like gold.

    • No, not at all. Operating companies with cash flow and earnings are not like gold.

      BTW, let me know when Gold has a P/E or an earnings statement

      • bobnoxy says:

        I bought a bottle of whisky a few months ago that has tripled in value since, and it doesn’t have an earnings statement or a P/E either. Didn’t seem to need either, nor did the painting Cohen bought from Wynn after he put his elbow through it.
        Two different worlds. Stocks, and hard assets. One needs stock valuation metrics, the others do not.

      • Pointfinder says:

        My point is that even though a COMPANY has a P/E and an earnings statement, the owner of its common STOCK (for stocks that don’t pay dividends) is entitled to nothing.

        So the link between the company and the stock is entirely faith based. There’s some value based on the possibility that a company may pay a dividend in the future, but that’s not what we’re talking about.

        Sure, we learn the faith in business school that we have various ways of valuing a stock based on it’s so-called “intrinsic value,” but unless it’s paying me cash every quarter, that’s religion, not finance.

        AAPL right now pays 2.5% on an investment. That’s intrinsic value.
        GOOG pays nothing, but is valued more highly than AAPL (24 v. 9 PE).
        Yet GOOG shares have no intrinsic value, since they pay nothing.
        How’s that different from gold?

  18. capitalistic says:

    In a normal economy, there should be a negative correlation between equities and gold.

    Gold is a worthless asset, and should be considered a hedge, NOT an underlying investment strategy.

  19. dina says:

    There are 3 billion people in India and China who buy gold for fun, not for investment.
    “We are expecting a whopping 50 per cent growth in sales volume during this season over the same period last year,”
    “people are still waiting for the prices to decline further”

  20. neddyj says:

    Barry – you pointed out on Friday that gold falling was a ‘good thing’ / positive development for the market, and this debate over its value or lack thereof is very interesting. As a consumer, I like lower prices for commodities. As an investor, I have observed gold behave well (generally) when there is great fear in the market. So your point is certainly not lost on me, falling gold may mean a pullback in overall market fear. However, what about all of the other commodities that are dropping like rocks? It seems like if gold were falling and everything else was stable or higher – that would be an accurate read-through. With the other commodities dropping now as they are – this suddenly seems like a liquidity driven event. If so – I would argue that the drop in gold may not be a good thing….stocks will fall too. Levered up hedge funds will sell stocks as well as gold. As Art Cashin says ‘if you can’t sell what you want to sell, you sell whatever you can’…

  21. Willy2 says:

    “Gold is a trade” ??? Hathaway is – IMO – more right than mr. Ritholtz believes.

    The main reason why gold rises is (indeed) negative REAL interest rates. But my favourite indicator tells me that interest rates are becoming LESS negative and seem to be on their way to becoming positive. Like in the second half of 2008.

    Gold mining shares are a different story. It’s important to look at the profit margins of these mines. and they seem to be improving.

    • Willy2 says:

      Hathaway (IMO, wrongfully) assumes that Quantitive Easing automatically will lead to (much) higher inflation or even Hyper-Inflation. But that – IMO – proves that Hathaway doesn’t understand the difference between literally printing money and monetizing debt (=Q.E.)

      In that regard I would say the following:
      “Hyper-Inflation requires Hyper-Deflation”.
      “Hyper-Inlfation is a politcal choice”.

      Sources: Hugh Hendry & Robert Prechter

  22. mad97123 says:

    “A Permanent Investment”
    Jeffrey Saut
    February 25, 2013

    In Barnard Baruch, Park Bench Statesman (1944), Carter Field writes:
    Baruch liked gold mines. There is always a market, he pointed out, for their product, and at a satisfactory price. Gold, he insisted, is one of the very few things in the world that approaches the status of a permanent investment. Baruch told the story of a Rothschild who set up a “permanent trust” consisting of five different currencies. By the time Baruch heard about the trust, it had shrunk to one-fifth its original value. “But gold doesn’t yield any interest,” a friend protested after listening to the story. “True,” replied Baruch, “but consider the fabulous wealth of some of the Indian princes and rajahs. I had dinner with the Maharajah of Kapurthala on one occasion in Vittel, France. Several of us talked afterward about his wealth, and someone said that among the treasures of these Indian moguls were gold coins brought to the East by Alexander the Great, hundreds of years before Christ.”

    Their gold and jewels had earned no interest during these more than 2,000 years, but they still had their capital. Suppose they had attempted to provide income from it. They might have been no more far-seeing than the Rothschild I mentioned. If they had tried speculation there have been many times in each century that they might have gone broke. No, save for gold, jewels, works of art, perhaps good agricultural land, and a very few other things, there ain’t no such animal as a permanent investment. Even in agricultural land, Baruch pointed out, there is some risk. Lands that made men rich in rice cultivation years ago in Baruch’s own state of South Carolina are not nearly so valuable now that rice is produced more economically in other sections. City real estate is subject to all sorts of hazards, as he learned when he no longer needed his big Fifth Avenue mansion.

  23. Moss says:

    Remember oil went from $78 to $147 then crashed to $32 all within 6- months. Now triple that low. Commodities have a LOT of hot money and the volatility most certainly can be linked to the Monetary Polices we have seen in recent years. Lets see how far oil crashes. Oh yeah Apple has already crashed.

  24. Estragon says:

    Further to your point 3 above, not only is Cyprus a terrible example of “governments’ new confiscatory inclinations”, gold isn’t a exactly a bulletproof solution for investors. Gold can be banned for private speculation, confiscated outright, or holdings taxed should these “confiscatory” governments find it expedient to do so.

    Eg. in 1933 the US criminalized private possession of gold for monetary purposes, requiring delivery of all such gold to the federal reserve in exchange for US$20.61

  25. Here’s why I have some gold in my portfolio (and more, in ounces and dollars, today than before):

    (1) Gold zigs when other markets zag. It’s an excellent portfolio diversifier. It also provides clues that other markets are at risk — in 2008 it provided a nice early warning of the credit crisis, before the stock market imploded. Today it seems to be signaling that the sovereign debt crises are entering a deflationary phase, so stocks and weak sovereign bonds are again at risk, especially abroad.

    (2) The huge global debt burden can only be cured through some combination of inflation, default, or growth. I don’t have a crystal ball to know what proportion of those 3 outcomes we will see, but I doubt they will be well-balanced at all times, and I believe that gold will be a good hedge whenever the “growth” option doesn’t seem to be working out. Barry writes, “Gold had a huge rally came as the dollar collapsed 41% from 2001 to 2007. The Dollar is now at a three year high. Why would that be a fundamental positive for Gold?” If one thinks the dollar is unlikely to remain high, that is just as bullish for gold as it was in 2001. Even more so if one thinks that other sovereign currencies are also unlikely to retain their current purchasing power. Another parallel to 2001 is that stocks again appear to be overvalued.

    (3) Gold does have fundamental value, both aesthetic and industrial. Ask any jeweler, ask your wife, ask your central bank why it hasn’t officially sold the nation’s holdings and provides custodial services for other nations’ gold as well, ask why statues and artwork are gilt… Gold has unique scientific properties and is hard to obtain. Today’s prices may be inflated compared to the price level that would prevail if gold was only used industrially, but it’s worth more than zero. Based on the prices which prevailed in the late 1980s and 1990s and factoring in overall inflation since then, gold’s fundamental value is probably in the 600-800 range.

    Given that gold and the S&P are priced about the same, and that the S&P’s fundamental value (based on the assumption that profit/GDP ratios and CAPE’s will mean-revert to historical levels) is also in the same 600-800 range, one might say that gold is no more overvalued than the stock market on fundamental basis!

    (4) Despite all the price drops, gold has still outperformed stocks over the past several years. Here’s a chart of GLD (nominal price) vs. the S&P500 (nominal, no dividends) since GLD’s inception:

    Even factoring in the 0.4% annual cost of GLD and the ~2% annual dividend yield on the S&P, GLD is still the clear winner for this time period.

    (5) Gold is insurance against historical episodes of financial insanity. Despite all the insanity of the last 110 years, the price of tuition at a good school, measured in gold, has stayed the same to within a factor of 2-4 and in fact it’s about almost exactly the same now as it was in 1900, 1910, 1920, 1940, 1950, 1975 and 1985! Given that my main investing concerns revolve around providing for retirement in an uncertain world, and providing for my children’s education, that is comforting.

  26. ElSid says:

    That deposit accounts in Cyprus are “a capital loss in a high risk trade” is quite a stretch. Did you forget that they have a 100,000 euro deposit insurance in Euroland? These “high risk trades” have ATMs attached to them. What does that picture connote to you? These aren’t people with money in MF Global!

    You need to get out of New York more, probably.

    Also, please expound on the fundamentals of the dollar. Zero intrinsic value, no income, does not compound earnings, have to pay (in real terms) to store it (currently), etc. The only thing it has going for it is that the Fed wants you in it or bonds or stocks denominated in it.

    “You can’t eat gold”, but you can make a fine soup out of dollar bills by boiling all the greasy fingerprints off of them.

    • The bulk of the assets in Cyprus were much greater than $100k Euros. This is Russian oligarh/plutocrat money. You are kidding yourself if you think this was anything else than a high yield trade

      • ElSid says:

        Those specifically weren’t the people who I was talking about, and you didn’t specify. I have no love lost for those people, but, like drones and such, it can certainly be a slippery slope. To be fair, the Eurocrats backed off of the sub 100k Euro accounts, but all that proves is they are making this up as they go. The best and brightest.

        So who’s buying all this gold, BR, now that the fundamentals fail? China doesn’t much care, I’ll bet, that a bunch of econs can’t figure out the “fundamentals” of gold using higher math.

    • Estragon says:

      “please expound on the fundamentals of the dollar”


      1. The $ is a currency, gold is not. The defining characteristic of currency is taxes must be paid in currency.
      2. It very has very real “intrinsic value”. That value is the willingness and ability of the issuing government to levy and collect taxes with which to its debt (of which currency forms part).

  27. comet52 says:


    It has are none.
    This is not to sat gold…

  28. mpetrosian says:

    Idiot thoughts:
    Central banks are buying this shit like crazy, but they also sold shit loads at the wrong time too.
    Records/charts for gold prices go way way back. It looks like gold goes parabolic until some new currency
    regime is embraced by society and then falls off a cliff That hasn’t happened yet and wont for some time as central banks can keep this up for a long while. Read about some of the shorting and positioning/conflicts of interest happening with gold. Central banks getting what they wanted? And don’t even think about pulling the conspiracy theorist endoftheworld card on me. Hank Paulson and Gdubya
    pulled a fucking Uhaul up to the Fed Reserve and sailed off into the sunset, anything can happen.

  29. btowers says:

    Stocks have seen 50% drawdowns over the past decade plus. So has gold. So what?
    If gold is halved again, I’ll double down again. I have strong hands. BR just has recently bias from the 1980s.

    • Doubling down is a suckers play.

      And its “Recency” not “recently” — and 1990s, not 80s.

      • mad97123 says:

        Doubling douwn at $675 would be a suckers play? That seems a little extreme.

        Perhaps the world’s future brides will not want to wear gold wedding rings now that gold has no value to Wall Street.

      • Doubling down is always a suckers play, as it reflects a stubborn refusal to admit error

      • BigD173 says:

        So let’s assume that in early March 2009 I had 50% of my assets in U.S. stocks — which assets had declined significantly during the preceding months as I stubbornly held them — and the remaining 50% in cash.

        Was it at that point a “suckers play” to double down by putting the rest of my assets into U.S. stocks? Should I instead have admitted my error and sold my remaining U.S. stocks?

      • That is exactly my point — you can evaluate stocks based on their earnings capacity. You CANNOT do that with Gold!

        And to use your example, had you doubled down and then doubled down again any time US equities got cut in half or objectively got cheap, you made money.

        The last time Gold collapsed, if you doubled down, you had to wait 25 years to get back to breakeven. THAT was not a good use of capital.

      • Martingale is only suicide when trading items or making bets where your portfolio can go to zero.

        Doubling down on a bad stock is a bad idea; the stock can go BK.

        Doubling down on the S&P500 is probably a GOOD idea; it’s unlikely that the entire US market will go to zero, and if you’re confident the price will recover, it’s a buying opportunity. The one exception to this was 1929-1932.

        The more general exception is after any bubble, if you think the long-term value is far less than half of the peak price. So it boils down to whether or not you think gold can/will go to zero, or whether it will stay down for a long time. Obviously market participants have diverging opinions on questions like this, or the price wouldn’t be where it is right now.

  30. DiggidyDan says:

    Funny, before clicking through i thought to myself. . . Fundamentals? WTH is Barry talking about? Gold doesn’t have any fundamentals, it’s a store of value commodity. . . Then I read your post and it is exactly in line with my standard thinking of Gold. As for precious metals in general, they are the greater fool game to a T. . . see this top call on silver from when the fools were buying at the top:

    When naive investors are buying into the game at the “advice” of brokers and financial “news” casters and their friends giving them tips, you know the jig is up soon. I’m actually thinking about rebalancing and bottom fishing some CRBQ as commodities collapse this year as I unwind bond holdings. Everybody hates it, time to buy in again.

  31. [...] April 15, 2013 tags: Gold From Barry Ritholtz at The Big Picture: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no [...]

  32. Angryman1 says:

    Gold is heavily internationally driven. Global disinflation has begun and gold is reacting favorable.

  33. [...] Ritholtz writes: History shows Gold trades differently than equities. Why? It comes back to those [...]

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

  35. NMR says:

    It could be semantics but while generally agreeing with BR I’d slightly disagree on the status of gold as an investment. It is an asset class distinguished by certain characteristics and therefore a legit investment. This however doesn’t mean all the usual rules with investments of any sort don’t apply which seems the general position of the goldbugs. We’re currently in the early stages of a gold sell off because the opportunity cost of holding it as a hedge have been rising for two years. The fact is the entire goldbug, Austrian, inflationista, bond vigilante worldview has been disproved over the last five years and the gold sell off is just another brick in this wall. The response has been conspiracy theories and largely specious comparisons with equity and fixed income markets. Did reasonably savvy investors just sit on their hands and/or double down in 2007/8? Of course not. Who knows whether the sell off will be as bad as that in the early 80′s when gold lost two thirds of it’s value, a value it’s never regained in constant dollars (a Brit friend of mine lost his shirt in Kruger rands) but of this I’m sure gold is no more immune to economics than any other investment.

  36. [...] Barry Ritholtz has a ‘gold’ post up. It has some poor arguments contained in the article. 3) Cyprus is a terrible example of “governments’ new confiscatory inclinations.” Readers need to recall that Cyprus banks were paying 6% in a zero interest rate environment. These were not “risk free checking accounts” but rather high yield, high risk trades. This “confiscation” as described by the usual paranoics was nothing more than a capital loss in a high risk trade. (about 16 months of interest payments). [...]

  37. [...] Nobody knows. What are you going to look at, cash flow and earnings? [...]

  38. [...] What Are Gold’s Fundamentals? at The Big Picture Another insightful gold piece; in this article, Barry Ritholtz discusses what he thinks are the fundamentals of gold, and whether or not the precious metal has “true” intrinsic value. [...]

  39. [...] gold and why gold sucks as an investment. It is nothing more than a flimsy rant.  He also cited a “marvelous takedown” by Barry Ritholtz, a formerly humble and generally impartial commentator who is now enjoying [...]