The Forgotten, “Barbarous Relic” is No Longer Forgotten
For those of you unfamiliar with the popular description John Maynard Keynes gave to this once popular commodity, I am talking about Gold; the forgotten and also hated metal.
At least this is the case here in the Western world, where Gold is considered by most Americans at the moment nothing more than something nice to make jewelry out of.
Most Americans have no clue what the Gold price currently is (it’s not far away from $1300/oz! and there is a hilarious video about this on You Tube where people could have won a free 1oz Gold coin if they correctly guessed the Gold price on a California beach), or that since the Tech bubble burst in 2000, Gold has rocketed up from around $250/oz to be the best investment of the last decade.
Yet, despite this increase in price, Gold is still not even at its 1980 inflation adjusted high yet (Gold is only at a nominal high. It will have to go to over $2300/oz for it to be above its 1980 inflation adjusted high of $800/oz in today’s dollars).
The idea that physical Gold and Gold stocks are prudent insurance and good investments against financial calamity and panics is still preposterous to many on Main St, USA including most financial advisors.
Even most Wall St people dislike Gold and don’t know what to classify it as.
If you don’t believe me, I dare you to watch CNBC for a few hours a day for about a week straight and you will come to the same conclusion as me: that there is a very large anti-Gold crowd.
A lot of this is because Americans really do not understand the basics of investing, personal finance and money management.
This might be a more modern and forward looking magazine, but I am advocating for Americans to look back to the past, many decades past, and return to the basics of economics, finance and investing.
Before everything became so complicated that people hate it, are bored after 5 minutes of learning, or it gives them a painful migraine.
Generations of past Americans, before the Baby Boomers, were taught the basics and, unfortunately, the generations since have not been taught the same simple and yet effective approach.
That approach starts with a revival of common sense.
First and foremost, Gold is money. Real Money. Not some piece of paper, fiat currency backed by nothing that governments say is money by “fiat” (which is Latin for decree or order).
The problem with fiat money is that governments throughout history have a hard time being responsible and limiting the quantity of it.
Once enough money is printed, money adheres to the laws of supply and demand just like any other commodity, and a flood of money (or helicopter drop in Federal Reserve Chairman “Helicopter” Ben Bernanke’s case) destroys the value of each unit the more that is printed.
The reason I bring this up is because our current money or form of the US Dollar, the Federal Reserve Note, is fiat money or only a currency.
It is not real money because it does not properly store its value or purchasing power.
Purchasing power is defined by me as the value of one’s hard work or labor each day that you earned by working, saving and/or investing and what it will buy you in terms of goods and services now or at a later date in the future when you decide to spend the money on something.
Your purchasing power, if you’ve saved any money from the money you’ve earned, is supposed to be safely stored so one does not work each day for free when they expect a fair day’s wages.
Your purchasing power is then normally “stored” in your checking or savings account at a bank.
A loss in purchasing power means the value of your work was not properly saved by whatever you saved, invested or stored that money in (if you didn’t spend it all!).
Since 1913, the US Dollar has lost greater than 95% of its purchasing power!
Does that sound like a great store of value to you?
Gold has been real money in many countries for many thousands of years.
And, after more paper, fiat currencies have gone to the big currency graveyard in the sky (and most paper fiat currencies are up there and many only make it 40 yrs or so before new versions of a currency need to be issued), Gold will just continue to do what it always does because it’s very dependable and safe; it’s boring.
It’s not sexy and chic like owning stock in Apple or another tech company with the hottest gadget on the market now, but stocks can crash and go to zero. Gold won’t.
But, in this environment, dependable and boring are a good thing as volatility in many paper, fiat currencies and the markets of many asset classes are anything but stable.
The best thing Gold does is it acts as real money and a store of value. Nothing else over thousands of years, besides maybe Silver and Real Estate until its most recent bubble, has preserved its purchasing power and stored its value better than Gold has.
Because of its ability to store value and retain purchasing power of someone’s savings, owning physical Gold coins and bars is the ultimate insurance policy.
Gold stocks, which give one leverage to higher Gold prices and also act as a proxy to higher Gold prices, also have similar properties, unless the Gold company is poorly managed.
This is something that many of us were never taught in schools and some of us, some more than others, are currently learning the hard way as their investments continue to lose value.
Once you own physical metal, and store it yourself or have someone else store it in a safe location, it’s outside the financial system and is safe from a crash.
The value of physical Gold might drop in dollar terms, but it will NEVER go to ZERO!
In just the last 6 months alone, the US Dollar and the Swiss Franc have both lost 13% of their value relative to Gold. That would be a 26% devaluation for both currencies in just one year against Gold if this trend were to continue as the worldwide “Race to Debase” for currencies continues.
Governments all over the world, including our own, want a weaker currency because it allows them to pay off their obligations such as Social Security, employee pensions and other benefits, and interest and principle payments on our national debt to our foreign creditors with cheaper money.
A weaker currency also makes exports from the exporting country a lot cheaper and more competitive in world markets.
Selling lots of exports creates a trade surplus and helps boost your GDP, which is supposed to be based mostly off your country’s total production of goods.
This is why China and Japan are adamant about keeping their currencies relatively weak to the US Dollar.
Unfortunately, this is very bad for savers and investors desperate for higher yields on bonds and for higher returns in the form of dividends.
What has been going on for years now in our markets is punishing savers and investors who are trying to do the right thing and not spend all of what they make, pay off all of their bills on time and save up for a rainy day and/or retirement.
Who can blame people for wanting to pay off all of their debts, stop spending and save more of their money now than they have had to in years before?
After what has occurred in world financial markets over the last few years with the subprime crisis, the credit crisis, the real estate bubble and other potential developing asset bubbles and financial panics yet to come that are devastating the US and Western European economies, Wall St & Main St need to rethink modern finance and investing techniques.
As a matter of fact, so do the professors who teach finance and investment management at major universities.
Are the markets really efficient or do they operate mostly on the 2 most basic emotions of human beings, fear and greed, the majority of the time?
Shortcomings were especially exposed in the areas of proper risk management and asset allocation during 2008.
Many longtime professionals dropped the ball and were caught off guard when the housing bubble popped along with the credit crisis that had our entire country “on the brink” of a complete economic collapse.
Yet, there was a small minority of people who were more prepared for what happened and they made out like bandits with exponential profits while everyone else scrambled to keep from drowning in inescapable losses.
Those people used common sense over models and formulas.
Modern asset allocation strategies and modern portfolio theory based only on risk formulas and mathematical models failed.
They failed to account for what author Nicholas “Nassim” Taleb called in his book, the “Black Swan” event.
Taleb uses this analogy to describe the first ever sighting of a Black Swan by scientists when all scientific and historical records assumed all swans to only be white because a Black Swan sighting had never been seen and documented before.
In other words, it is almost impossible for modern financial modeling and risk management with their complicated formulas to properly account for seeing a “Black Swan” when only White Swans have ever been seen before.
Because of the increased intervention in markets, the lack of understanding the absolute basics earlier generations of Americans understood and the lack of common sense many people still have, I think the odds are very high that more Black Swans (asset bubbles popping or exploding like the Tech bubble of 2000 and the credit crisis of 2008) will occur more frequently in the near future.
So how does one account for a “Black Swan” in their investment portfolio?
What is true portfolio insurance? Just how non-correlated are different asset classes like stocks, bonds, commodities, etc and will they really act differently from each other by going up when the other goes down?
After what happened in 2008, I think the answers to these questions need to be discussed at length all over again.
According to economic forecaster Ian Gordon of the LongWave Group, it takes about 2.5-3 generations or about 70 years for people to forget the lessons their past generations had to also learn.
Wall St and Main St both need to relearn lessons from generations past that have long been forgotten or, unfortunately, that I think we have been taught to forget or never learned in the first place.
If my grandfather were still alive today, he’d be ashamed at the financial irresponsibility the America he helped protect during his WWII service has recently shown.
He’d be ashamed that Americans lack enough common sense to save a healthy percentage of their incomes, live below their means, pay off all of their debts and save and invest so they don’t have to work forever to pay off their debts and are able to retire comfortably.
My grandfather also owned quite a bit of Gold as the ultimate insurance policy against financial Armageddon, bad inflation or bad deflation.
Owning some gold is a lesson many of us have forgot or have never been taught in the first place.
We have been taught in modern finance and economic classes that common sense is not king, that we need and can use to protect us complicated economic formulas and mathematical models to predict everything accurately (yeah right!), that we can borrow and spend our way to prosperity at the government, corporate and individual levels and that we don’t have to save and invest to get something we want and that we can have it now on credit and pay for it later.
But, all we really need to be successful in life is to use common sense.
As Americans, except for the last 2-3 yrs, many of us especially in my generation have only grown up during great and prosperous times in our country’s history.
Until recently, my generation had only seen good times.
Past generations of Americans, like the Americans who grew up during the Great Depression of 1929 or the ones who fought for our country in World War II, like my grandfather, learned all of these lessons the hard way and understood very well what it meant to have no debt and to start saving more and to live within your means and save and invest your way through hard work back to prosperity.
Saving and investing is what paved the way for the greatest few decades in American history, when our country became richer than any other country in the world by an order of magnitude when war veterans returned home at the end of WWII.
This is a lesson Americans, for the most part, have completely forgotten.
So why is common sense in personal finance and investing not taught at all really in most modern finance classes??
Why isn’t a Common Sense 101 for personal finance class mandatory at high schools, college and/or business schools?
Why is a proper financial education not offered in schools or anywhere at an affordable price?
Why isn’t a 10%+ asset allocation strategy of physical Gold and some exposure to Gold stocks a requirement in everyone’s investment portfolio as insurance against further financial crises, calamity, chaos, inflation and deflation?
I’d like your thoughts and feedback on this. Please feel free to comment.
Finally, Gold and silver are both still extremely undervalued in my humble opinion at these prices! Especially when we are really only in the eye of the hurricane and have yet to go through perhaps the part of the storm that is much worse than 2008!
Jason Burack is an Investor, Entrepreneur, Financial Historian, Austrian School Economist and Contrarian. He Co-Founded the startup investor education and financial education company Wall St for Main St, LLC to try to help the people of Main St, USA by teaching them the knowledge, skills, research methods and investing and trading ideas of Wall St so they are better prepared to navigate through these difficult financial waters after witnessing the damages caused in 2008. After witnessing the damages first hand, and realizing his lack of a financial education, he set out on a mission, or rather a crusade, so he was properly financially educated and more prepared for whatever else is to come in the future and to help others through these difficult and uncertain times. He has spent the last 2.5 yrs mastering conventional and non-conventional thinking in investing and economics to help himself and his consulting clients achieve great investment returns and ultimately financial freedom. You can reach Jason at his blog at http://www.jasonburack.com . He and his Wall St for Main St Co-Founder, Mo Dawoud, are diligently working on setting up a Wall St for Main St investor education website in the near future that will offer both free content and subscription content for people who want to learn at an affordable price. You can also find Jason’s articles, podcast interviews, video blogs and other related content on the popular investing websites: The Daily Gold, The Financial Tube and The Daily Commodities.