Why Wall Street Hates Gold
March 24, 2010 by John Myers
Wall Street hates gold. In fact they hate it as much as government does.
The reason is simple: ordinary investors that count on gold don’t need Wall Street. They don’t need the slick stockbrokers, the puffed-up analysts or the aristocratic money managers. In the eyes of Wall Street gold owners didn’t contribute a red cent to the $20-plus billion in bonuses they got last year.
Twenty-billion dollars might seem like a mega-lottery, but Wall Street always wants more. Bonuses were bigger last year than the year before even though Wall Street almost hurtled the world into an economic dark age.
But Wall Street is scared. They understand they are living it up because of the Barack Obama Bonus Brigade.* Most of all they fear sanity just might be contagious; that more and more investors will be reluctant to throw their hard-earned savings into a marketplace that is overpriced and on the verge of collapse.
Little wonder that CNBC, The Wall Street Journal and the rest of the financial media hammer away at gold. They reiterate the Keynesian mantra that it is a barbarous relic and call it a vastly overpriced commodity whose bubble is about to burst.
“Talk of a Gold bubble over the past 6-9 months grows louder and louder,” writes The Market Oracle. “It is comical and a sign of desperation among those losing their grip on the levers of power and influence. I have never seen a bubble so heavily recognized and announced.”
It does seem strange that today Wall Street is clairvoyant about the billions of dollars invested in the gold market, even though a couple of years ago it was oblivious to the trillions of dollars at risk in the sub-prime lending market.
Of course gold-bashing is nothing new. I saw it when I was a kid and watched my dad, C.V., on the TV show Wall Street Week. It was 1976 and gold was trading for a little more than $100 per ounce. That didn’t stop the host, Louis Rukeyser from calling my dad a gold bug and ridiculing him for telling his subscribers to buy bullion.
But Rukeyser and the rest of the Wall Street establishment weren’t laughing near so hard four years later when the Dow Jones Industrial Average was trading at 800 while gold was fetching $800.
Dirt Cheap, But Not for Long
The last time gold was frothy you could swap an ounce of bullion for a single share in the Dow Jones Industrial Average. Today it takes about 10 ounces of gold to buy a single share in the Dow.
But just how expensive is gold these days? It turns out that no matter how you measure it, gold is cheap. The reason is because the dollar buys so little. Back in 1980 when I was graduating from college I sold 10 Krugerrands and bought myself a shiny new Pontiac Trans Am right off the showroom floor. Today I would need 30 Krugerrands to buy a comparable Chevy Camaro.
In fact, if you account for the dollar’s decline in purchasing power, bullion would trade today at nearly $2,500 to have the same value it had in 1980. And even if you think gold only spiked above $800 per ounce, and a much fairer top is $700, it would still have to trade at $2,000 in today’s money just to have the same relative value.
Finally, bubbles usually burst because of inflated supply and falling demand. Not much sign of that in the gold market.
According to a recently released report by The World Gold Council, overall investment in gold was 7 percent higher last year than in 2008. It seems incredible, but gold demand actually climbed despite rampant fears of deflation and a physical shortage of gold. Moreover, in 2009 total funds invested in all forms of gold were a whopping 20 percent higher than in 2008.
Yet even as demand for the Midas metal continues to grow, production isn’t keeping pace. Output of gold from South Africa, the United States, Australia and Canada has dwindled every year over the past decade.
These countries, which produced two-thirds of global gold production through the 1980s, now produce less than half of the gold mined.
Over the past decade big gold companies have grown not through exploration but via the purchase of reserves in the form of corporate buyouts. The truth is it is getting harder and more expensive to find gold.
“In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools,” wrote National Geographic in January 2009. “Now the world’s richest deposits are fast being depleted, and new discoveries are rare. Gone are the hundred-mile-long gold reefs in South Africa or cherry-size nuggets in California. Most of the gold left to mine exists as traces buried in remote and fragile corners of the globe.”
When I was born some 50 years ago companies could get about 12 grams of gold for every ton of rock you pulled out of a mine. Today they have to mine four tons of rock to harvest that much gold.
So there doesn’t appear to be enough gold to satisfy demand, at least not at these prices. But there certainly has been an avalanche of money. Consider this: in the past half century the above ground levels of gold have doubled. Meanwhile M3, a broad measure of money, has risen from $300 billion to $10 trillion. In other words, there is twice the amount of gold as there was in 1960. But there are 30 times more dollars.
All of which leads me to think that Wall Street has it picture perfect once again; perfectly wrong. The real bubble is with paper assets. The only silver lining in any of it is that it will blow Wall Street to smithereens—right where it belongs.
Action to take: continue to accumulate gold. I’ve been telling subscribers this since October 2000 when I was writing Outstanding Investments. My stockbroker friends thought I was dead wrong then. They think I am dead wrong now. I’ve been getting a lot of last laughs and I expect to get a lot more.
Yours for real wealth and good health,
Myers’ Energy and Gold Report
* Footnote: Last month New York State Comptroller Thomas DiNapoli admitted that Washington was responsible for lining Wall Street’s pockets with billions even as the rest of the country was mired in recession. “A lot of this (bonuses) is fueled by federal money,” DiNapoli said.